Covid-19 was officially declared a pandemic Wednesday, and stocks officially entered a bear market, falling more than 20 percent from their peak just last month. The two milestones are related. Even in the best of times, markets are tuning forks not just for the sound of economic activity but for public sentiment about the future. Today, that sentiment is agitated, fearful, volatile. There are reasons to be concerned and to pay attention, and reasons as well to discount the most extreme moves.
Stock prices reflect expectations of future profits, and investors see the virus dampening economic activity and reducing profits. Until the extent of the decline is clearer, the natural reaction will be to sell. On the flip side, markets will almost certainly rebound before the world stabilizes. That happened in 2009, when markets reached their nadir in early March, long before the global economic recovery was certain. And it happened in October 2002, long before economic activity picked up after the tech bubble and 9/11 recession. And markets appear not to be factoring in any government stimulus in the form of tax cuts or new spending, which will likely be forthcoming.
In short, markets are telling us to brace for an intense economic contraction everywhere with little response by governments worldwide. That is possible and dire, but given past experience, it is not likely.
Starting last week as the virus spread through Europe and the US, global markets absorbed that this is no longer a China syndrome. Every economic assumption that seemed valid a month ago is now being reevaluated, and none is being revised upward. The result has been a level of volatility and occasional panic in financial markets not seen since 2011. On Monday, stocks fell almost 8 percent; on Tuesday, they rose 4 percent, before diving again on Wednesday. Interest rates have plummeted as investors flee to perceived havens of safety; US government bonds approached zero interest, their lowest levels ever, before recovering somewhat.
Mega-tech companies have not been spared. The companies that have led the markets—Apple, Microsoft, Amazon, Google—have each shed nearly 20 percent of their value from recent peaks, through Wednesday. Some semiconductor companies have lost 30 percent or more, and high-flying software companies such as Salesforce and ServiceNow have seen major declines. The disruptions to supply chains for computer chips, parts, and finished goods ranging from iPhones to cars are only now being felt. Apple a few weeks ago announced that it would not meet its forecasts for the current quarter because of supply chain disruptions in China, where its phones are assembled; that was before the virus spread aggressively into Europe and the US, raising the specter of lower demand as well as reduced supply. Travel companies have fared even worse. JetBlue withdrew its yearly forecast; United Airlines said that bookings are down 70 percent; Expedia and Bookings.com have seen rapid contraction. Airline stocks are off more than 40 percent from their peak in February.
Unless you’re employed in the financial services industry or enjoy actively trading your retirement income, it’s often wise to ignore market gyrations. This is not one of those times. Financial markets are telling us something that we should heed: The economic trajectory that seemed reasonable even a few weeks ago is not going to be the trajectory for months—not for airlines, not for discretionary retailers, not for industrial conglomerates or small businesses, and not for the tech companies that lubricate everything.
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The unanswered question, of course, is how long the disruptions last and how deep they go. The wave of corporate conference cancelations, travel restrictions, directives to work from home, and the almost complete cessation of global corporate activity will exact a real cost on businesses’ bottom line. With more school closings and restrictions on large gatherings, the ripples of these effects will expand. That’s because spending by consumers drives so much of our economic activity, and it is about to slow dramatically. Add to this the plunge in oil prices caused by lessened demand, plus a Saudi-Russian feud over production. That will stress bond markets that have loaned companies trillions of dollars on the expectations of business and risk as usual when the period we are entering is not at all usual.
Unhelpfully added to the mix are the magnifying effects of today’s technology-fueled markets. Computer-directed algorithms working in milliseconds now account for half of all trades by some estimates; more aggressive estimates suggest that the figure could be closer to 75 percent. Those programs feed off of volatility. Hence the big up and down swings.
Of course, markets crashed and soared long before machines took over. But a person can’t enter 1,000 trades a minute. In periods when prices and expectations are suddenly reset—during a natural disaster, a war, a terrorist attack, or, as we have now, a pandemic—markets create more churn and amplify uncertainty.
On the flip side, the virus is hitting us in a time when most companies are well-capitalized and the global economy has been chugging along. Yes, there are many soft spots and problem areas, ranging from the absence of any meaningful cushion for US wage earners to health care systems unequipped for a pandemic. But imagine if the virus had hit in 2010, just as the world was starting to climb out of the financial crisis. By contrast, the markets recently have been extremely robust. If global stocks fall around 10 percent more, they will be back to where they were in December 2018. That’s a steep fall, but not a historically onerous one. What’s more, markets are for now highly functional and relatively resilient. They are not endlessly resilient, but they are not incredibly fragile either.
Times like these are rare. In fact, this is likely to be a dramatic and, let’s hope, singular moment in global history, as activity throughout the world nearly halts. Whether or not this is a legitimate reaction to this disease, it is the reaction. It would be foolish to discount the risks, but it would also be unwise to expect that all worst-case scenarios will be realized. This pandemic won’t derail everything unless panic and fear rule. Markets are barometers, and often misleading, but in heightened moments they say something about hopes and fears ahead. And because markets usually integrate the worst case, the moment there is some sign of markets stabilizing will be the first indication that we are closer to the end of this global crisis than the beginning.
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