Economic Perspective - The Evolution of Financial Market Panic
by Robert F. DeLucia,
Summary and Major Conclusions:
Last week’s equity market decline was the worst since the 2008 financial crisis, while government bond yields plunged to all-time lows. This Special Report provides an update of health conditions around the world and the likely impact of the virus on the world economy, along with the likely implications for world financial markets in 2020.
- Stock prices and bond yields declined with lightning speed last week as the coronavirus epidemic threatens to evolve into a pandemic. The cumulative decline in the S&P 500 is nearly 13%, while bond yields have plunged to all-time record lows. Last week’s equity market decline was the worst since the 2008 financial crisis.
- While the number of new infections in China has allegedly peaked, new cases outside of China remain in a steep uptrend. Although far from assured, there are increasing odds that Europe and North America will face similar economic dynamics that have unfolded in China and parts of Asia.
- The primary economic impact stems from public health efforts to contain the virus, rather than the illness itself. Quarantine measures to contain the spread of the virus within China have undermined confidence and negatively affected exports, services, consumption, freight, travel, and manufacturing.
- Additional containment efforts outside of China could result in significant short-term economic weakness, but should not derail the 11-year old business expansion. Following a disastrous February, business activity in China appears to be in recovery mode, but the damage to global supply chains will continue to cripple manufacturing and trade worldwide.
- History reveals that epidemics and other natural disasters tend to halt economic growth in the short term, but unleash sufficient pent-up demand to boost aggregate spending, output, and capital investment in subsequent quarters.
- It is impossible to develop a credible economic forecast until there is evidence of a peak in new cases worldwide, which could be weeks away. The most likely outcome is a sharp decline in economic activity in the first half, followed by a strong rebound in growth during the second half of this year.
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