Feverish Stock Price Reactions to COVID-19

This paper studies how markets adjust to the sudden emergence of previously neglected risks. It does so by analyzing the stock price effects of the 2019 novel Coronavirus disease (COVID-19) pandemic. The telecom and health care industries did relatively well, while transportation and energy plummeted. 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 earnings conference call that contained a discussion of "Coronavirus" took place on January 22. The "Outbreak" phase followed, during which China-oriented stocks and internationally oriented stocks more generally 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, investors became increasingly worried about corporate debt and liquidity, indicating widespread concerns that the health crisis may evolve into a financial crisis.