It’s in the news wherever you look. As of February 6, the spread of the novel coronavirus has infected over 30,000 and claimed the lives of at least 634. It’s quarantined two cruise ships in Japan and Hong Kong. US equity markets have seen some turbulent trading. Could it be the beginning of a depression?
Historically, when there have been other outbreaks of infectious diseases or pandemics, the markets may experience a slight hiccup and then quickly recover. This chart shows the recovery of the market following several pandemics.
Some say a fast-spreading virus like the coronavirus is a “black swan” event. According to Investopedia, “A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.”
Seema Shah, chief strategist at Principal Global Investors said, “Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons, social-media driven news cycle, the interconnectedness of global supply chains and a pricey stock market. These make Wall Street more vulnerable to a black swan.”
What effect is this ‘black swan’ having on the markets in the world?
Asian markets have fallen between 4.4 percent (Australia All Ordinaries and Japan NIKKEI 225) and 13.2 percent (China Onshore CSI 300) since January 17. China’s drop was the biggest in almost 13 years. This happened on Monday, February 3, with the market opening after being closed since January 23. Some pledges and cutting of rates appear to be helping markets recover. For more details, see Markets Insider article.
What is happening with US markets?
The US stock market finished 2019 with some of the best annual returns seen in years. January started 2020 at or near all-time highs. Yet, it has been reported the coronavirus will affect many aspects of our lives. Not only the big name brands, but smaller companies will feel some economic implications.
US based companies are shutting down their stores in Wuhan, China, where the virus originated. Also, the US-China trade agreement could be in jeopardy. China may not be able to fulfill their obligations because of weeks-long factory closures.
In 2006, Fidelity Investments commissioned a report and noted in the conclusion, “We cannot draw any fixed conclusions about the effects of pandemics upon stock-market performance. Equity markets react unpredictably to the unknown; nevertheless, such events should not be examined in isolation, but viewed in common with other prevailing market conditions.”
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