Several people have contacted me about the Coronavirus and the panic in the stock market. We went from a new record in the market to a correction in 6 days! I thought I’d briefly explain why the market went into crisis mode.
We have been through this before. China has become an epicenter for outbreaks like SARS, Avian Flu, Swine Flu and now the Coronavirus. These outbreaks happen in China because they have a dense population and their leadership is negligent at preventing outbreaks.
The scary part about the Coronavirus is that it can survive 12 days on open surfaces and can be easily passed like the common cold. You might not have a fever and can be infected and infecting others. The good news, early reports suggest it isn’t as effective in the heat. Hopefully, this to be contained as the weather heats up. Moreover, scientists say there’s a drug that failed to help in a previous outbreak but is showing great promise with the Coronavirus. Disclosure: I’m not epidemiologist!
Why is the market freaking out? It’s estimated that 400 million people in China are locked down and aren’t working. That’s more than the entire US population. Tech items to shoes aren’t getting made. Another fear is that if China doesn’t grow by 4.5% GDP then 50% of Chinese banks could default unless the Chinese government intervenes. We know what our banking crisis did to the world economy in 2008. Moreover, the virus is spreading to other countries and outbreaks are happening in Europe and the Middle East.
Look for airlines, cruise lines and anything tied to travel or hospitality to suffer while the Coronavirus panic continues. With less travel oil prices will suffer. Companies that are tied to global trade will have their supply lines disrupted for months to come.
What worries me more than the Coronavirus? Recently the Federal Reserve took an unprecedented step to cut interest rates by .50% in hopes of stabilizing the market. Moreover, they injected around $150 billion into the repo market in part because banks don’t want to part with their money. (A repurchase agreement or repo is when a bank sells government securities on an overnight basis and then buys them back the following day at a slightly higher price.) Our economy is slowing and I don’t feel the Fed’s actions are prudent. We need more fiscal policy. The Fed started QE last year along with rate cuts and injecting money into the repo market. Thus, we are looking at déjà vu all over again as these measures aren’t boosting the economy and are only propping up the market.
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Matt Maciel, MA, MBA