COVID-19 Shakes Investor Confidence in Financial Market and Economic Forecasts
February 24, 2020
The coronavirus outbreak that surfaced initially in China some two months ago presents the greatest known unknown to hit financial markets in some time. The disease is spreading geographically in patterns that have health professionals quite perplexed, and that isn’t surprising since asymptomatic victims can be infectious days before feeling sick. Not enough time has yet elapsed to postulate reasonable guesstimates on a number of pertinent matters:
- the disease’s lethality.
- the most vulnerable populations regarding age, ethnicity, class, or nationality.
- how contagious the disease is currently.
- the likelihood of it mutating and whether that will make it more or less lethal or contagious.
- how soon a vaccine can be developed and distributed to counter its progression.
- the impact on economic activity and political stability in different countries.
- whether a pharmaceutical accident or act of bioterrorism might have played a role in unleashing the COVID-19 virus.
- and how long it would take the outbreak to run its full course if no medical remedy is deployed to treat it.
Investors are doing what’s to be expected when presented with a surprise whose evolution is poorly understood but potentially very disruptive to economic activity and policy and political developments. Risky assets like equities and high-yielding currencies are being swapped for safety havens like fixed income securities, gold and the dollar. The 1.38% 10-year Treasury yield, a 3-1/2 year low, is down more than half a percentage point already this year, about 1.25 percentage points below its year-earlier level. Such is also inverted relative to the 3-month T-bill rate. Fed officials don’t want to react merely to financial market conditions but rather to measurably adverse effects on the economy caused by the coronavirus, but political pressure on them to act will likely pick up soon.
One worst case scenario would be an outbreak as devastating as the Spanish flu of 1917-18, which sickened about a third of the world’s population and from which about 50 million people died. Such severity seems unlikely in part because of the availability now of antibiotics to treat secondary bacterial infections that caused many of Spanish flu’s deaths. One estimate made some 7 years ago felt that an outbreak then as bad as the Spanish flu could result in a $3 trillion reduction in global GDP, or roughly a 5% drop. The flu a century ago produced more havoc in Europe than in the United States. A great pandemic now would seemingly do more harm to developing economies than developed ones with better medical care.
The world had entered a decisive year even before the COVID-19 virus pushed its way onto center-stage. The U.S. presidential election is just 8 months away, and Democratic Party front-runner Sanders and others are presenting the election’s outcome as the last chance to avert existential calamity to thousands of animal and plant species including mankind. Nationalism is in ascension in the United States and many other countries. Xi controls China more tightly than any ruler there since Mao, and Putin arguably is Russia’s most authoritarian leader since Stalin. How resilient will global politics prove if the current pandemic evolves into the worst seen in a century? The Spanish flu broke out a year and a half before the end of World War I. The war to end all wars instead was followed by bouts of high inflation and unemployment in Europe, a rise in extreme politics — communism in Russia and fascism in Japan and parts of Europe — and ultimately global depression and another and more deadly world war.
Investors await clarification of the COVID-19’s epidemiology but investors in the meantime are sensibly not postponing their response until all the facts are known.
Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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