The CEO of Alibaba's coronavirus remarks suggest U.S. stock market valuations are not pricing in the full extent of the pandemic's risks.
The stock market seems to be shrugging off coronavirus fears since it became a pandemic last month.
Amid startling news of drastic measures taken in China to contain the disease, the Dow Jones charted a new record Wednesday. But the rally did lose steam Thursday after the previous evening saw a massive spike in new cases.
Chinese officials confirmed over 15,000 new cases of coronavirus at a press conference Wednesday evening East Coast time. China also confirmed 254 more deaths from the virus. Switching from DNA testing to faster CT scans to confirm new coronavirus infections led to the sudden spike in official counts for the disease.
Still, Alibaba (NYSE:BABA) CEO Daniel Zhang’s warning Thursday suggests the stock market is in danger. It may not be pricing in the full extent of the damage coronavirus is causing.
On a Thursday phone call with analysts discussing Alibaba’s earnings beat, CEO Daniel Zhang called the crisis a “black swan” event. He warned the challenges coronavirus poses will have a “significant impact” on China and the entire world.
Zhang says many employees haven’t returned to work after leaving for Chinese New Year. That was over two weeks ago. He says the delay has prevented merchants and logistics companies from resuming operations. It’s brought parts of the Chinese economy to a standstill. China’s productivity has never been more important to the U.S. economy and stock market. U.S. analysts have compared coronavirus to Lehman.
If coronavirus is indeed a black swan event, it would be the catalyst for the stock market to reckon with its historically record high valuations. A black swan event is a rare, unexpected event that has severe consequences on society or the economy. According to Investopedia:
The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader. Taleb wrote about the idea of a black swan event in a 2007 book prior to the events of the 2008 financial crisis.
While any given black swan is unpredictable by definition, the stock market can safely assume there will be more. Taleb argues organizations should be prepared for them.
Taleb argued that because black swan events are impossible to predict due to their extreme rarity yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan accordingly.
But this macroprudence doesn’t seem evident in the systemic risk profile of the U.S. financial system. The U.S. economy’s aggressive risk-on stance is also quite apparent in the consumer debt and stock market.
The trouble with black swan events is their impact only seems obvious in hindsight. What if coronavirus pushes China into a deep and sustained recession? Will stock valuations hold? Or will coronavirus be the swan that breaks the bull’s back?