After the fear of last week, a new sense of relative calm has descended on the market so far this week. There has been coordinated government response globally, in an effort to assure the populace that they stand ready to limit the negative economic impact of the coronavirus. The responses this week:
As welcome as these steps are, we believe investors should not be feeling that the global economy is out of the woods as it relates to the coronavirus. At this point, the enemy government regulators are fighting is investor sentiment. We believe that the current levels of infection in the U.S. and Australia are not extensive enough at this point to do direct damage to those economies. The big concern of policy makers appears to be expectations. Particularly, they seem to be worried about the potential steps that individuals and government may take to avoid broader infection.
For example, if U.S. consumers broadly decide that they are not going to shop or go out to restaurants, that would lead to lower consumption rates—and 70% of the U.S. economy is consumption. If governments close schools and businesses in highly affected areas, that too will likely lead to a lowering of economic activity. If business leaders expect that to happen, they may also become more cautious in their spending.
It is the confluence of these events that policymakers are trying to avoid. In response, they are indicating by their actions that if private spending falls in the economy, they stand ready to support the economy through fiscal spending. Policymakers are also saying that if business sentiment falls, the prospect of virtually free money—through lower central bank interest rates—may help make it easier for businesses to continue to spend money.
It is completely rational for us to worry about the health and safety of ourselves and our loved ones. But economically, to paraphrase Franklin Roosevelt, the main thing we have to fear is fear itself. We do not claim to have any edge or unique ability to forecast the progression of this outbreak. Furthermore, medical experts have told us that such an exercise is effectively impossible. While we believe negative economic damage of the coronavirus will be temporary, it could be significant. Either way, it is good to see that economic policy makers stand ready to limit both the depth of that damage and the length.
Investors should expect the market to seesaw in the days and weeks to come, as concerns over the impacts of the virus battle the optimism that these steps will be effective in containing the damage.