Economic Perspective - The Coronavirus and Financial Markets

by Robert F. DeLucia,
CFA Consulting

Summary and Major Conclusions:

• The world economy is being held hostage by the virus. The epidemic has spread rapidly beyond China and into Asia and parts of Europe and the Middle East, with no end in sight.
• Above all else, financial markets detest uncertainty, and there are very few definitive answers at the moment. Markets prefer conclusive bad news rather than total uncertainty, which explains why investors have panicked, pursuing a massive flight from risk assets and stampede into safe-haven assets.
• COVID-19 has already dealt the world economy a severe blow, most notably in China and nearby Asia. The impact on the US economy has been mild to date.
• The primary economic impact is derived from public health countermeasures to contain the virus, rather than the sickness itself. Quarantine measures and other efforts to contain the spread of the virus have negatively affected all forms of business and economic activity.
• Chinese tourism and business travel are on hold; airlines have significantly curtailed flights to Asia; the closure of China’s factories has disrupted global supply chains; and consumer spending has weakened because of quarantines and store closures.
• Financial markets will be at risk until the number of new cases outside of China reaches a peak, which is impossible to determine at this time. Asset prices tend to move to extreme levels during periods of panic, along with heightened volatility.
• The number of new cases outside of China is rising rapidly just as the number of cases inside China appears to be peaking. Chinese authorities are encouraging businesses to resume production and employees to return to work. Hopefully, these government directives will not reverse the decline in new cases within China.
• The US economy is more insulated than Asia and Europe but is not immune. I have revised first quarter US GDP growth from 2% to 1.5%. US exports of goods and services to China will decline, while local production could be temporarily disrupted.
• First quarter GDP forecasts for China and the world economy have been severely downgraded. Instead of 6%, I am now expecting less than 3% GDP growth for China. I have revised my forecast for Q1 world GDP from 3.3% to 2.5%.

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