Coronavirus and markets: What we learned yesterday

As of 3 March 2020, at 18:00. GMT

 

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, in an effort to assure the populace that they stand ready to limit the negative economic impact of the coronavirus. The responses just in the last 24 hours:

 

  • Yesterday the G-7 leaders pledged that they stand ready to act in the face of possible negative impacts of the coronavirus in their countries. This was received as generally good news, but did fall short of the announcement of actual stimulative fiscal policy that some expected.
  • Today the U.S. Federal Reserve (the Fed) announced an emergency rate cut of 50 basis points to help fight the potential negative impact of the virus on investor sentiment.
  • Also today, the Australian Reserve Bank cut its overnight rate to a record low of 0.5%.

As welcome as these steps are, we believe investors should not be feeling that the economy is out of the woods as it relates to the coronavirus. At this point, the enemy government regulators are fighting is investor sentiment. 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 saying 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 an edge or unique ability to forecast the progression of this outbreak. Furthermore, leading 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 attempt 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 reducing the damage. We have seen that today and should expect the trend to continue.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

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