As always, even absent global crises such as the coronavirus, we have to balance what we know with what we don’t know to properly assess what may happen next in the global economy and markets.
What we know, as I write, has upended the scales to the extent that the Standard & Poor’s 500 Index crept within 2 percentage points of a bear market less than three weeks after its all-time high. We know that:
- Equity markets that had priced in overly optimistic assumptions about economic growth, especially in China and the United States, have been vulnerable.
- The likely significant near-term economic impact of the coronavirus outbreak hasn’t played out yet.
- Saudi Arabia and Russia triggered an oil-market shock through their battle for market share by lowering prices and vowing to produce more oil even as a world worried about the virus will want less. The shock has pushed down asset prices and threatens an industry shakeout.
- Equity, fixed income, and now oil markets reflect the elevated level of uncertainty, and economic data expected in the weeks ahead likely will too.
What we don’t know
How the significant uncertainty about the coronavirus outbreak is resolved will help determine whether the global economy can avoid recession, and the job losses and bankruptcies that typically accompany it. These two questions, whose answer we’ll know in the coming weeks, will matter:
Will new cases of the coronavirus outside China start to crest by April?
The timetable in China, where the World Health Organization reports the virus outbreak has peaked, would appear to signal a similar plateau before May outside of China. But only time will offer financial markets an understanding of whether containment efforts are succeeding and the end is in sight.
How will policymakers around the world respond?
The U.S. Federal Reserve on March 3 cut the target for its key interest rate by 50 basis points, to a range of 1.0% to 1.25%, in an emergency move prompted by the virus outbreak. Historically, when the Fed has cut rates between scheduled policy-setting announcements, it has followed up at its next policy-setting meeting with a cut of equal or greater magnitude. Markets are currently pricing in an additional 75-basis-point cut ahead of the Fed’s next rate announcement, scheduled for March 18. (A basis point is one-hundredth of a percentage point.)
But more accommodative monetary policy, which is intended to spur lending and spending—and fiscal policy with similar goals, for that matter—can accomplish only so much. This is especially true as consumers worried about the coronavirus are less likely to be out and about. In the European Union and Japan, where key interest rates are below zero, monetary policy in particular offers little to stimulate economies.
Rather, to face a known, significant threat such as the coronavirus outbreak, a meaningful, globally coordinated fiscal response targeted at industries that need it most, such as health care, is required. The public and the economy will both need the proverbial “shot in the arm.” Decisive fiscal action can shorten the recovery period.
Effectively directed fiscal policy won’t be a panacea, but it can help counteract the virus and its spread and help minimize the human cost of the illness. And that’s more important than anything else.
This isn’t the global financial crisis
There’s one other thing that we do know, and it should give investors heart: The coronavirus is unlikely to be the second coming of the global financial crisis. The GFC was exacerbated by compromised underlying factors within the financial system that required a structural realignment of markets. Such a dynamic isn’t in play with the coronavirus, where recovery is more likely akin to a disaster-relief effort.
Investors, we’ve been here before. We’ve seen 13 corrections and eight bear markets in global equities in the last 40 years. That’s about one every other year. And over that 40 years, global equities increased by a magnitude of 17 times.1