The last couple of days the stock market has reacted strongly to news of the COVID-19 virus spreading more widely. The effects of the virus on the global economy are still largely unknown and unpredictable. The possible scenarios are vastly different. The virus could stay contained in the few, if growing number, of hot spots or it could spread to a global pandemic. As with most things in life, the actual outcome is likely somewhere in the middle.
Past incidents of novel viruses or other contagions have produced heightened volatility in the stock market but no lasting effects. The situation now is somewhat different because there has never been this much integration of economic activity. Interruptions to supply chains can reverberate throughout the globe. No country is completely isolated.
The first quarter of this year, global growth will slow. How much is uncertain. People are going back to work in China but consumer spending there and in other areas of virus outbreaks will be impacted. Sights of St. Mark’s Square in Venice devoid of tourists are eerie. But the tourists will return, and supply chains will get back to normal. This is a one-time hit. Once the worst is over the markets will return to what is important, the future.
The markets had been quite complacent about the potential impact of the virus. The spread to Italy and Iran, then warnings by the CDC woke the fear response. The pendulum swung from complacency to anxiety. Neither will likely have been appropriate. The equity markets are back where they were in mid-December. We will likely experience a higher level of volatility because the range of potential outcomes is so large. It is important to keep evaluating the impact of such a globally impactful event, but it will not pay to focus too strongly to the potential for the worst outcomes. As they say, “Keep calm and carry on.”