What happened

Shares of retail stocks were tumbling again Thursday morning as investors sold off companies that were particularly at risk due to the coronavirus outbreak, which government and financial officials are saying could seriously impact the United States. Last night, the first "community case," or transmission within the U.S., was reported in California, further adding to worries about the contagion.

The market continues to believe that legacy brick-and-mortar retailers, including department stores and mall-based chains, are set to be losers from the outbreak both due to supply chain disruptions in China and as more Americans may turn to online shopping if the virus outbreak (officially known as COVID-19) becomes a threat in the U.S.

Among the retail stocks that fell by 6% or more Thursday morning were Nordstrom (NYSE:JWN), Macy's (NYSE:M), Urban Outfitters (NASDAQ:URBN), Gap (NYSE:GPS), Kohl's (NYSE:KSS), and Bed Bath and Beyond (NASDAQ:BBBY). All of these stocks had fallen sharply earlier in the week on coronavirus fears, so it's not surprising to see them down again today.

After plunging early in the morning, these stocks, along with the SPDR S&P Retail ETF (NYSEMKT:XRT), began recovering shortly after 10:30 a.m. EST. The retail ETF had been down nearly 5% at it its low this morning but bounced back as investors seemed to believe that the sector had been oversold.

By 12:15 p.m. EST, the index was positive for the day, though it fell back into negative territory after 1:30 p.m. EST. The retail stocks listed above had all crept into positive territory except for Macy's, though they were back in the red by 2:23 p.m. EST.

A blurry image of people coming up an escalator in a mall.

Image source: Getty Images.

So what

The wild swings in the retail sector today are a reminder that investors don't really know what to make of the coronavirus yet. In some ways, the market seems to be overreacting to fears of the outbreak, as stocks like those of U.S.-based restaurant chains and theme parks have also fallen sharply even though they face little direct exposure to the virus so far. That's a sign that investors are assuming the virus will cause disruptions beyond China and the retail supply chain that will cause Americans to stay home.

Meanwhile, U.S. officials, including President Trump, have tried to boost the market by saying that the virus is under control and that it should not impact long-term investors. After the market entered correction territory this morning, the broad-market S&P 500 recovered some of its losses, while retail stocks came roaring back.

These stocks were already cheap before the coronavirus scare took hold of the market and have become even cheaper this week.

We're also in the middle of retail earnings season, giving these stocks an opportunity to change the discourse and give investors clarity on the current impact of the virus. Macy's, for example, reported better-than-expected fourth-quarter earnings earlier this week, but it was not enough to overcome the coronavirus-related sell-off. CEO Jeff Gennette said that the virus appeared to be having a small impact on international tourism in the first quarter. Regarding the disease's impact on Macy's supply chain, he said it's still too early to tell, and he hadn't seen a huge impact. He also said that the company has seen a slowdown of product coming out of China, as expected.

Now what

A number of other retail stocks in the group above are set to report earnings in the next two weeks, including Nordstrom, Gap, Kohl's, and Urban Outfitters.

While holiday-quarter results are always important, investors will also want to pay attention to comments about the supply chain and inventory related to the coronavirus. These retailers all count on China as a major supplier -- some to a greater extent than others -- and stand to be most impacted by ongoing manufacturing slowdowns in China. Other concerns about the coronavirus seem more tangential.

Today's movement in the sector is a reminder that stocks will remain volatile as the coronavirus situation develops. Retail stocks like these, which are sensitive to macroeconomic data, are already priced low because the market believes them to be in a weak competitive position. There will be even more volatility as news reports on the virus continues to come out.

At the very least, the recovery this morning shows there's a floor on the retail sell-off for now. If the market does bounce back from the coronavirus scare, retail stocks could be big winners.