Two forces have always guided the stock markets: fear and greed. In the age of the coronavirus, fear dominates.
Markets are no longer sure what the future holds in terms of how well a particular company will financially perform as the number of people infected by the virus grows — with no foreseeable end in sight.
“Stock prices are a reflection of future corporate earnings,” said Bankrate.com Chief Financial Analyst Greg McBride. “When you suddenly don’t have visibility as to what those will be, that calls into question the valuation you currently placed on that stock. … The mountains of uncertainty has only led to further reactionary selling.”
The pandemic has also caused global supply-chain disruptions, which have contributed to recent drops in the markets.
“Already, many global companies, including automakers and tech giants, have suspended production, closed facilities and retail outlets, and furthermore warned of delivery delays,” said Lindsey Piegza, the chief economist at Stifel.
When the coronavirus outbreak began in Wuhan, China, last December, the Dow Jones Industrial Average was just above 27,000 points. It had skyrocketed to nearly 30,000 points by early February. By then, the virus had spread across the world and the United States, and the markets crumbled as investors questioned the future and sold their stocks.
“It is the unknown which has fed the selling,” McBride said. “When all those models about economic growth and corporate earnings are called into question, it really undermines the lofty evaluations that had been placed on the markets.”
Jared Bernstein, an economic adviser to Vice President Joe Biden during the Obama administration, thinks clarity in the markets will return when containment becomes a reality.
“When will containment occur?” he rhetorically asked when speaking with the Washington Examiner. “I think the markets at some level are always reflecting a forecast of the real economy, and the question is: Once containment is achieved, how much of the canceled events bounce back?”
The widespread cancellations, such as South by Southwest, presidential campaign rallies, and sporting events, have hurt investment portfolios, according to Mark Hamrick, Washington bureau chief and senior economic analyst at Bankrate.com.
“That’s wealth destruction, and that’s aside from the health impacts, which are significant,” he said.
Bernstein questioned whether any of the cancellations would be rescheduled after containment of the virus has been achieved. If they and any future cancellations are not rescheduled, the global economy could lose at least $1 trillion this year in gross domestic product, according to a March report by the United Nations.
“We envisage a slowdown in the global economy to under 2% for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September,” said Richard Kozul-Wright, the director of the U.N.’s Division on Globalization and Development Strategies in the report.
In the report’s worst-case scenario, the world economy could grow only 0.5% in 2020 because of the virus, which would be a $2 trillion hit to global GDP.
“There’s a degree of anxiety now that’s well beyond the health scares, which are very serious and concerning,” Kozul-Wright said.
The stock markets are also very anxious right now, according to Bernstein.
“There’s a huge psychological element that gets massively amplified at a time like this,” he said.
Calming the markets will not be easy, and Washington doesn’t have the best track record in this area. When corporate fraud sent markets plummeting in 2002, the nation’s capital created an oversight board for accounting firms that audited public companies.
It’s been nearly 20 years since the bill was enacted into law, and the jury is still out on whether it improved the transparency of financial statements. However, there is no question that the legislation did nothing to stop the bloodletting in 2008, when markets precipitously fell over the fallout regarding mortgage-backed securities.
Economist Robert Fry, a former senior economist at DuPont, cautioned against throwing money at the coronavirus issue to fix it. It’s something Washington has a habit of doing, but Fry warned that it will not calm the economy or the stock markets as long as the virus remains uncontained.
“You send people money. Are they going to get on a plane? Are they going to go out to a theater or restaurant? I don’t think that giving people money, in this case, is going to help,” he told the Washington Examiner. “If the government is spending money, they should spend it on test kits and developing a vaccine and maybe building more hospitals. It should be geared toward addressing the cause of the problem, which is preventing [the virus] or getting people through it.”
Test kits are in short supply, but production is ramping up. Eventually, a vaccination will likely get created, and at some point, the virus will be contained. When that happens, stock markets might be the first indication that the worst is over, McBride predicted.
“Once there is a sense that the worst is behind us and there is greater clarity on what lies ahead, the markets will be poised to recover,” he said. “That’s gonna happen long before consumer sentiment or news headlines change.”
