Market Reaction to CoronavirusBy Clint Edgington
Posted on March 2nd, 2020
Fears of contagion of the Coronavirus triggered the market to experience it’s fastest 10% drop from an all time high last week and prompted the Fed to slash the Fed funds rate by .5%. This is an interesting market development; on it’s face such a small percentage of the population has been directly affected however as you dig into the potential impact on supply chains you begin to understand the uncertainty that’s descended on the markets. As we all know, financial markets hate uncertainty. In addition, when the market is generally priced on the higher side of fair, it doesn’t take much to set off a revaluation. The very concern about an issue can become a self-fulfilling prophesy. Corporations get concerned about their supply chain, order less inventory, etc. etc. You can quickly daisy chain a set of scenarios that begins to impact corporate profits significantly.
While this market downturn won’t be fun for any of us, it does provide us with a market shock- which have been rare lately- that we can use to analyze our portfolios and the other market participants. For example, since our latest major market downturn we have new players in the market, such as roboadvisors and momentum traders. It will be interesting to see how they reacted, performed, and impacted the market. Recent epidemics have seen very little long term market impact:
For economic history nerds out there (like me), it’s interesting to look back further to see how past pandemics have impacted financial markets and people’s lives.
Catherwood, Jaime. “Pandemics & Markets”. Investor Amnesia. March 1, 2020, https://investoramnesia.com/2020/03/01/pandemics-markets/
Decambre, Mark. “How the stock market has performed during past viral outbreaks, as coronavirus spreads to Italy and Iran”. MarketWatch. February 24, 2020, https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-coronavirus-spreads-2020-01-22