What Happened Last Week?
New cases of coronavirus were discovered around the world. More unsettling information from healthcare specialists was announced. Multiple countries declared the virus a pandemic; and one Bloomberg Opinion argues that coronavirus is here to stay: like the common cold or influenza.
This sent the public into a panicked frenzy, purchasing face masks and other basic essentials. WeWork issued a work from home policy for some of their employees. And Wall Street? They launched into a selling frenzy.
Last week represented the worst week on Wall Street since the 2008 financial crisis. All three indexes dropped into correction territory. The Dow lost 12.36%. The S&P 500 declined 11.49%. Even the Nasdaq lost 10.54% over last week. All companies across every industry suffered.
Expectations Around Coronavirus
Analysts around the world shifted their 2020 economic forecasts. The Organization for Economic Cooperation and Development (O.E.C.D.) offered a bleak outlook. If the outbreak sweeps through the Asia-Pacific region, Europe and North America, then global growth will drop in half (1.5%) in 2020.
Even if the outbreak is mild and mostly contained outside China, global growth could still drop about half a percentage point. Fed Chair Jerome H. Powell stated, “the fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity”. Markets expect the Fed to cut rates by as much as 50 basis points by March. One Goldman Analyst also voiced beliefs that the federal funds rate may be lowered by 100 points by the end of the year.
Public Sentiment Of Fear
Wall Street’s rout has sent concerns around consumers pulling back on their spending; people are wondering: how scared should they be of coronavirus?
Companies have entered a hiring freeze. Existing employees that work in Asia have been quarantined by their companies with work-from-home policies. This is particularly concerning because consumer spending plays a huge role in the U.S. economy. Furthermore, it has driven a majority of the performance of the global economy for a decade.
A decrease in consumer confidence, along with coronavirus’ hit to the manufacturing and production of toys, medical equipment, auto parts and smartphones from China, has the business community on edge as the likelihood of recession increases.
The Bigger Problem
Central bankers from the world’s largest economic centers have scheduled a conference call on Tuesday, March 3rd to discuss lowering interest rates. Such action would be taken as a response to the global outbreak. This caused the stock market to rally on Monday. It also caused the yield on the 10-year United States Treasury to fall to a record low of 1.08%. This continues a downward trend from 2.7% last year.
Long-term interest rates fall to very low levels during times of financial panic and recession. It is important to note the economy is in solid shape currently. The Fed itself has said so. Coronavirus and its spread represents the threat of economic disruption but there has not been any measured disruption yet.
So if the Fed cuts rates on the expectation of the coronavirus outbreak leaving a large, negative impact on the economy, what happens when that impact actually occurs?
Will the US, too, fall into the realm of negative rates with further cuts?
So What Now With Coronavirus?
Fear around coronavirus are threatening to push rates below those of the global financial crisis in 2008 or the Great Depression. Central Banking policy will determine a lot of the stock market’s movement.
But if Central Banks cut rates now, when they’re already at low levels, there’s an issue. They’ll lack the firepower to truly bolster the economy if the coronavirus spreads.
At the end of the day, Central Banks should act on data. They should institute policies to address real economic disturbances, not the fear of them.
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