Markets kicked off what promises to be another wild week on Monday, thanks to growing fears about the effect of the coronavirus on the global economy.
After Asian markets were rattled overnight, the Dow Jones Industrial Average opened down a whopping 1,800 points or 7%. Just a few hundred points more, and we’ll officially be in bear market territory (defined as a drop of 20% off of the most recent peak). We are certainly there psychologically already. The S&P 500 also went down 7%. Oil prices crashed 30%. The 10-year Treasury yield dipped to a record low of 0.4% as world investors were desperate for any safe investment that still produced any semblance of a positive return.
Those who have a ways to go before retirement probably shouldn’t be checking their 401(k) balances or fretting on daily market movements, as the news is not likely to be pretty for quite a while.
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Investors hate uncertainty more than anything else. The whole market depends on people trying to assess and price risk. But there is such a wide range of potential outcomes when it comes to the coronavirus, which just appeared a little more than three months ago, that there’s no reason to be confident in any prediction. A Harvard epidemiologist has estimated that 40% to 70% of the world’s population, or billions of people could be infected. However, even if that were the case, there’s no way of knowing how many people would show more than mild symptoms.
There is also significant debate as to the actual fatality rate. Is it 2% to 3% as originally feared? Is it less than 1%? As former Food and Drug Administration Commissioner Scott Gottlieb noted about the seemingly promising news out of South Korea, “Remember, when you look at the South Korea data, the case fatality rate in South Korea right now is 0.6. But the time to death is three to six weeks. And most of the cases were diagnosed in the last 10 days.” In other words, it will take time for us to get a better idea.
Right now, what we do know is the coronavirus is shutting down or significantly impeding the world’s major economies and is spreading rapidly in the United States.
In the coming months, we’re likely to see markets continue to get pummeled, and then have occasional rallies in response to potential good news such as evidence of the spread slowing down, possible breakthroughs on anti-viral drugs or vaccines, and so on.
That brings us to the trillion-dollar question. Or the multi-trillion dollar question, really. And that is: Will the coronavirus peter out once we start getting warmer weather, or will it continue to grow?
There is a reasonable case to be made that it will slow down as we move toward the summer, based on what we know about similar viruses.
“Other viral respiratory diseases are seasonal, including influenza and therefore in many viral respiratory diseases we do see a decrease in disease in spring and summer,” Dr. Nancy Messonnier, director of the Centers for Disease Control and Prevention’s National Center for Immunization and Respiratory Diseases, has put it. “And so we can certainly be optimistic that this disease will follow suit.”
But at the end of the day, while that’s a logical prediction, it is at best an educated guess at this point. We have never been through the summer with this strain of the virus, so we don’t know.
“It’s a false hope to say, yes, that it will disappear like the flu,” Mike Ryan, executive director of the World Health Organization’s health emergencies program, said.
He explained, “We hope it does. That would be a godsend. But we can’t make that assumption. And there is no evidence.”
The difference between a virus that turns out to be seasonal and one that continues building even through the summer is the difference between a short-term crisis and a complete catastrophe.
Right now, the markets are, to a certain extent, pricing in the hope that it will start to fizzle in another month or two. If it does, China’s factories will be able to start humming again, restoring the supply chain, and starting to recover. Throughout the world, consumers will begin to unleash pent up demand for goods and services. People who have had cabin fever will start to travel and pursue leisure activities again. Markets will likely start to recover again.
But if it persists through the summer, that becomes a much different beast. There will be no time to regroup. Many businesses will have burned through inventory, and the supply chain will be indefinitely disrupted. Businesses that could perhaps survive a few down months will start to fail.
And markets will react accordingly.
So, buckle up for the next few months. And hope and pray that warmer temperatures will come to the rescue.
