Worse to come?
Photo: Kazuhiro Nogi/AFP via Getty Images
The Dow Jones Industrial Average is set to open down more than 800 points on Monday, as stock prices all over the world are falling due to increased fear about the economic impact of coronavirus. The fears fall roughly into two buckets: that economic disruption within China will persist longer and have greater impacts on global supply chains than initially feared, and that the epidemic will spread geographically. Rapidly growing clusters of cases in Italy, Iran, and South Korea have been driving the latter fear.
The Wall Street Journal has a useful roundup of global supply-chain effects. It’s not just that many Chinese factories are idled or running far below capacity. Lots of manufacturers in other countries rely on Chinese materials or components and are having to slow or stop their own production due to stoppages in China. Reduced production also means less business for shipping companies. On the services side, airlines and hotels are continuing to lose business as fewer people travel.
These effects are global, but they’re greatest in the countries most economically exposed to China, which tend to be the countries geographically closest to China. As the Journal notes, China’s economy is now much larger and much more globally interconnected than it was during the SARS epidemic in 2002 and 2003, which increases the risk of knock-on economic effects from China’s own epidemiological and economic troubles.
The sign of coronavirus’s effect on global economic output is obvious (“minus”), but what markets have been struggling with for weeks is the magnitude. How long will economic disruption persist in China, and how badly will other countries be affected? One thing that worries markets is increasing disruption outside China — Italian officials have been closing schools and canceling public events in certain regions, and South Korean officials have raised the country’s official threat level due to local outbreaks in those countries, for example — but it’s unclear how much worse these disruptions will get before they get better.
The prevailing attitude in the markets remains worry rather than panic. Assuming the Dow indeed opens down 800 points on Monday, it will be erase all the gains from 2020 and be down for the year. The epidemic has produced more dramatic moves in interest rates than in stock prices, reflecting a market expectation that the Federal Reserve will offset some of the economic drag from the epidemic with additional rate cuts. But equity prices reflect expectations of future corporate profits, which is to say they encompass a range of possibilities. The markets are pricing in the possibility that coronavirus will pass with modest damage to the U.S. economy, in which case they would bounce back up — and also the possibility that the epidemic will continue to get much worse, in which case they would fall quite a bit farther than they already have.