The S&P 500—the stock market index for 500 of the largest companies in the United States—closed off the week of Feb. 24 with the lowest results it had seen since the beginning of the 2008 financial crisis. The stock market endured a 10 percent decline—the steepest it had experienced since its all-time high.
Before the coronavirus stole the spotlight, Americans were basking in a thriving economy, one that has steadily grown after it recovered from 2008. However, because of such a bountiful past decade and how the Trump administration approaches international trade, investors were starting to fear a recession and bear market was due soon. These fears were empowered once the coronavirus struck China.
America has been due for an economic lull, and the coronavirus is the perfect catalyst. The virus acts as an excuse for the government and media outlets to amplify the situation, heighten public worries and push people to turn conservative within the stock market. Doing so enables America to make economic corrections, because the economy has been in a prolonged expansion phase.
To give some context, bear markets typically occur every three and a half years and last an average of 367 days (accounting for variability). It occurs when the stock market is steadily declining over a sustained timeframe. The last prolonged bear market began in 2007. Since 1927, there have been eight large bear markets and only three of those did not lead to a recession.
The coronavirus has shaken up the global economy predominantly through trade restrictions. Conglomerates such as Microsoft, Google and Facebook rely on their interactions with the Chinese market as a quintessential chunk of their revenue. Our economies are codependent. So when the world’s second-largest economy must close off its borders, the implications reverberate across the globe. Approximately 89,000 people are diagnosed with the virus, and 3,040 people have died. The coronavirus has leaked its way outside of China and is rapidly infiltrating other countries.
It is currently too difficult to tell how deadly the virus is, especially as the majority of the deaths were due to age (very young or old), or a pre-existing condition. In comparison, the flu kills roughly 300,000 to 600,000 people annually. This is not to say the coronavirus should not be dealt with lightly, as measures must be taken to halt its movement. Yet we cannot crumble into an abyss of hysteria. Filling the missing information with assumptions and theories will amplify and falsify the reality of the situation.
The mindset of the public will heavily influence our economic future. If people take a doomsday approach to the situation, then it will wind up having detrimental effects on society.
Clearly, investors do not share this mindset. How the economy will react in the near future is contingent upon how long the epidemic remains potent. It could be a short-term disruption, or it could have lasting effects on millions of people. Presently, there is no medicine available to combat the virus.
It is challenging to anticipate how much the economy will falter from this decline. But in the present, it can at the very least be seen as a correction of the markets. While damaging in the short-term, these fluctuations can create a prosperous future. It provides buying opportunities and adjusts overvalued asset prices. For those investing in the long-term, it is a good time to stand your ground and see the economic downturn through. Look into potential investment opportunities, as stock prices will dramatically lower.
The economic activity we are currently seeing as a result of the coronavirus is not surprising. In the typical business cycle, it is natural for a period of expansion to come to a peak and then ease into recession or potentially depression. Eventually, it will climb its way back up through recovery and make its way back to the expansion stage.
What is surprising? Nobody expected a virus, instead of the volatility of the political landscape, would pull the trigger.
