Nº 20-12: Feverish Stock Price Reactions to COVID-19

This paper studies how markets adjust to the sudden and rapid emergence of previously neglected risks. It does so by analyzing the stock price effects of the 2019 novel Coronavirus (COVID-19) outbreak. Over the first two months of 2020, the health care industry did relatively well in China, the US, and several other countries. Transportation and Energy plummeted everywhere. Within industries, US firms reliant on Chinese inputs and those with a strong export orientation towards China suffered. Sophisticated investors appear to have started pricing in the effects of the virus already in the first part of January (the "Incubation" phase), that is, before managers or analysts started paying attention; the first US earnings conference call that contained a discussion of "Coronavirus" took place on January 22. The "Outbreak" phase followed, during which China-oriented stocks (and more generally internationally oriented stocks) strongly underperformed. In the last week of February and early March (the "Fever" phase), the aggregate market first fell strongly and then entered a whipsaw pattern. But behind these feverish and seemingly behaviorally-driven price moves, some patterns emerge. In particular, the cross-section of stocks suggests that investors started to become concerned about corporate debt.