Coronavirus fears spread, and with them, fears of a recession.

What happened

The markets are sending a message about coronavirus: The recession risk is real.  

So opined the venerable Washington Post this morning, and if the coronavirus news wasnt bad enough already -- with a collapse in oil prices on top of it -- this surely would have been the straw to break the steel industrys back.

This afternoon, shares of Nucor (NYSE:NUE) are down 11.5% as of 2 p.m. EDT, and shares of archrival U.S. Steel (NYSE:X) are right down there with em -- 11%. European steel stock ArcelorMittal (NYSE:MT) has just plain collapsed -- down 18.7%, as have Brazils Gerdau S.A. (NYSE:GGB) and Companhia Siderurgica Nacional (NYSE:SID), down 17% and 22.25, respectively.


Image source: Getty Images.

So what

Suffice it to say that coronavirus concerns are at the heart of this sell-off. According to the latest data from the World Health Organization this afternoon, confirmed cases of the coronavirus just passed 110,000 worldwide, with deaths topping 3,800. More than half the countries on the planet -- 105 -- now report infections within their borders, and Italy is in the process of trying to quarantine a quarter of its population within its industrial heartland. Its about as certain as certain can get that the global economy is going to suffer.  

Recession, says The Post? You betcha. I honestly dont know how we can avoid it now.

Now what

When a recession strikes, the picture wont look pretty for steel stocks.

It doesnt really matter that these companies dominate the global market for metals. A recession will mean fewer people performing fewer services and making fewer goods. Fewer workers earning smaller paychecks and buying less stuff. Fewer automobiles sold, fewer washers and dryers -- fewer of everything, in fact, that requires steel as a component.

What does this mean for investors in steel stocks? According to data from Yahoo! Finance, analysts are still predicting that Gerdau will grow its earnings at better than 25% per year over the next five years, for example, and U.S. Steel at 39%. Thats highly unlikely to happen if a coronavirus-fueled crash in consumer demand combines with a collapse in energy prices to cause a recession.

Even the 6% earnings growth that analysts have forecast for Nucor might be a stretch.

Beware a recession, folks: It wont be good news for steel stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.


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