What is Coronavirus’s impact on markets?
Humans are illogical beings. Yet markets that act merely as extensions of our collective consciousness are supposed to separate themselves. In theory, they disjoin irrationality by the law of large numbers. This is why major world events are best viewed through the lens of the market. It´s a much better strategy than say, analyzing traditional media. Or simply going to the data. With this in mind, we will take a close look at our overall market outlook. We will understand what the impact has been so far, and thus where it might go from here. What has been Coronavirus’s impact on markets?
Investors scrambled over the past two days to grapple with the possibility of a pandemic. An uptick in confirmed cases of the Corona Virus outside of China has sparked fears which reverberated through markets yesterday and today. The DOW is down almost five percent to 27,629 as of writing (17:11 CET) and the Nikkei 22 hasn’t fared much better down three percent to 22,605. The bond sentiment is also changing with many investors starting to anticipate future rate cuts as both US and UK 10 year notes are down in the past three days.
The market is in a state of flux. Commercial and retail Investors alike are eagerly awaiting new data coming out by the minute on infections and their spread. Especially information surrounding the new cases in Mainland China and Italy. Due to Italy´s location inside of the European market and the manufacturing concerns of the later.
Information we´re anticipating
Investors should continue to monitor the data coming out of China to ascertain any returns to normalcy. Both high-frequency data within markets and the number of infections. We look forward in anticipation of the official Chinese PMI stats coming out later this week. Manufacturing slumping by 35-50% has been factored into pricing. However, the data itself will still be interesting. Specifically the output of factories in less affected areas of China.
The most impactful information yet to come will be the Fed´s stance on Corona and the derivative problems associated. The Fed cut rates three times in 2019, however, they have hinted towards a reluctance to do so again in early 2020. It seems as if the Fed is waiting until later into Q1 barring any drastic changes to make an official statement on the matter. Keep in that the Fed´s main tools at their disposal (easing capital constraint through rate reductions) could have little or no impact on economic systems outputs in this scenario. Due to the slowing of production being predicated on hazardous health conditions and qausi pandemic. The easing of capital would do little to stem growth. Because the means of labor are constrained by diminishing labor possibilities outside of our typical frame of reference. Thus a slight easing of capital pressure could do little to mitigate these irregular circumstances.
Where do we stand today?
The markets seemed to have positive sentiments regardless of Corona up until Monday. The positive info coming out of the US and Europe was holding up the entire system collectively. It will be very interesting to see how the markets react in the coming days and weeks if the virus starts to shift from its current state to borderline pandemic levels. As it currently stands the sharp dropoffs in the DOW etc. are predicated on the top-heavy nature that Tech and Manufacturing sectors have within the indexes. They have been disproportionately affected by supply chain issues and corollary manufacturing issues presenting themselves in Asia.
We know that markets have been operating at an optimized pace not seen in recent history. However, remember the quote by the great Warren Buffet ¨it´s only when the tide goes out you find out who is swimming naked¨. Is this the black swan none of us could have predicted long term? Only time will tell, but it´s undeniable that Corona as thrown a wrench into our system at the present. It’s pertinent, if not essential, to take heed of these recent developments. A keen investor will buy the dips (specifically those in tertiary portions of the market brought down systematically as apposed to objectively) and stray away from companies likely to stay in hot water for the months to come.
