The virus is doing what it does. The market does not like it.
Crude oil prices plummeted today on coronavirus-led demand shock and the inability of OPEC (Organisation of the Petroleum Exporting Countries) to get a deal to limit daily oil production. The result seems to be an old-fashioned price war.
- Normally, lower energy and gas prices would be viewed as being good for the consumer as it puts more spending money in their pockets.
- Unfortunately, this time it is very unclear whether or not consumers will go out to shops or restaurants or will travel to spend that money in the near term.
- That said, if the economic damage of this crisis is short-lived—say a quarter or two—then low energy prices could be another contributor to a V-shaped recovery.
Stock prices around the world plummeted today on the spread of the virus. U.S. Treasury rates continued to fall and the bond markets feel that a significant rate cut at the next Federal Reserve meeting is a done deal.
We do not claim to have any edge or unique ability to forecast the progression of this outbreak. Furthermore, leading medical experts have stated that such an exercise is effectively impossible. The pattern we saw in China and South Korea—the two countries with the worse outbreaks—appears to be holding true for the countries who are now battling the coronavirus virus.
Outbreak pattern in new countries similar to that of China, South Korea
That pattern is that the outbreak starts in a central epicentre and expands out from that epicentre. In the process, the number of new cases begins to increase at an accelerating rate. That now seems to be the case in a number of countries, and that understanding is negatively affecting the markets. As we have said, the steps that the government in China implemented to arrest this pattern have had a predictably negative economic impact—we believe it will be a relatively short-term impact, but a negative one nonetheless. There are many signs that conditions in China are getting better every day rather than worse, so that remains a hopeful sign, although constant vigilance will be a key. It was hard-fought progress that exacted an economic toll. How big of an impact remains to be seen.
How the level of government response helps shape the degree of economic impact
It would seem to us that the market is now struggling to apply that understanding to the problems affecting the newly impacted countries that now are fighting currently self-sustaining outbreaks. The more countries—and areas within countries—that are hit by the virus, the greater the response from governments to control it. The bigger the response to control the outbreaks, the bigger hit to economic activity.
For example, if a city tells employers to maximise telecommuting, think of the impact on local businesses. If very few people are going into the city centre to work, local restaurants, shops and service providers will see a dramatic hit to their businesses. The people employed in those businesses will likely get fewer hours and make less money—if they do not lose their jobs entirely—reducing their ability to spend money. If this condition lasts long enough, a significant number of those small businesses may be forced to close shop.
Economic impacts: Negative and significant, but transitory?
The length of this crisis will depend on the effectiveness of the efforts to control the outbreak. The length and depth of the downturn in economic activity will depend heavily on the response to the economic threats described above. We continue to expect that the negative economic impacts of the coronavirus, although significant, will be transitory. As such, we expect that a recovery from this damage will be V-shaped, because we expect that policymakers understand the long-term threat.
The worst-case scenario is that this transitory negative economic impact becomes more structural. This will happen if those local restaurants, shops and dry cleaners go out of business before things start getting better. This is why we and many others are expecting the government’s fiscal response be targeted to ensure that these small business—and other affected business such as airlines and hotels—have the ability to go through this valley of negativity and reach the other side. Such a government response should mean that when things start getting better, people will be able to return to their normal lives, because their normal lives are there to greet them.
Governments all around the world have said that they have these issues on their radar, stand ready to act and are planning more specific responses. We would expect to hear from them with more detailed ideas this week. Certainly, the market is waiting to hear from them. We believe this fiscal response is more important than the monetary policy response, as it relates to the near-term impacts of the virus.
The bottom line
Whatever the news of the day is for the foreseeable future, it is this tension and search for answers that is driving daily market activity. As we have said before, the unpredictable nature of this threat is making finding those answers more difficult. The market hates uncertainty above all things, as uncertainty begets volatility. Expect volatility.