Investors' confidence around the coronavirus may end up being misplaced, the former head of the International Monetary Fund's China division told CNBC on Wednesday.
"It could be a short-term shock but one that ends up having a somewhat longer-term impact," Eswar Prasad, now a senior fellow at the Brookings Institution and a Cornell University professor, said on "Squawk on the Street."
Investors initially showed concerns around the coronavirus outbreak, with stocks falling sharply, but many have rebounded on a more positive outlook.
Prasad said Wall Street may be less worried about the outbreak's economic consequences because it believes China's government will continue to take aggressive steps to prop up financial markets.
Prasad said he agrees with that view on policy responses, but suggested action from the People's Bank of China might not be enough to prevent negative economic impacts.
"There are many small firms, especially in the private sector, in the services sector, that are going to get hit, and for those to come back up it's going to be difficult," he said.
"Certainly, if it turns out to be a containable epidemic, if it turns out that the effects can be contained within the first quarter in terms of economic activity, then maybe financial markets will be proven right," Prasad said.
The S&P 500 and Nasdaq Composite rose to record highs Wednesday, continuing a strong start to the year despite uncertainty around the virus.
Alex Dryden, a global market strategist at JPMorgan Asset Management, told CNBC on Wednesday that investors have largely remained confident in the face of the outbreak because they are "taking a longer-term view on the coronavirus."
"They're seeing the actions that Chinese authorities have put into place to try to contain this spread and they view it as very much a Q1 phenomena," he said on "Squawk on the Street."
Still, Dryden said he believes the coronavirus will be "pretty detrimental to Q1 growth, particularly for China and the global economy."
Dryden said he has downgraded his Chinese growth forecasts for 2020 to about 5.3% from 5.8% and his global growth forecasts to 2.3% from 2.5%. But Dryden differed from Prasad in his assessment of how the outbreak could play out throughout the rest of 2020.
"With any of these events, as you move further away from it over 2Q, three and four, you typically have a degree of pent-up demand that unleashes itself onto economic growth," Dryden said.
The coronavirus has been contracted by more than 75,200 people and killed at least 2,000, the vast majority of whom have been in China.
It has caused significant pauses in daily life and economic activity in China. Factories have been shutdown longer than they normally are for the Lunar New Year, and stores have been temporarily closed, too.
On Wednesday, for example, Adidas said it has observed an 85% decline in business activity from last year's levels in China due to the coronavirus.
Chinese authorities have implemented widespread travel restrictions in an attempt to stop the spread of the virus within the country, as well as outside its borders.
Regardless of the lens through which investors are viewing the outbreak, it is wrong to suggest the market isn't reacting to coronavirus concerns, contended Scott Ladner, chief investment officer at Horizon Investments.
"The market is certainly pricing in the coronavirus right now. It might not be very obvious when you look at just the headline S&P," he said on "Squawk Alley."
Ladner pointed to falling yields on the 10-year Treasury — although they rose Wednesday after better-than-expected inflation figures — and a rotation into more defensive leadership in the S&P in recent weeks.
"Think of U.S. over international, growth over value, large cap over small cap," he said. "That's showing that the market is taking account of the virus. It may just not look like it when you look at the top-line numbers."
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