The U.S. stock market’s resilience has been nothing short of incredible as the coronavirus outbreak is already fraying the seams of the global economy. Buoyed by rhetoric that “the worst is over” and that “the Fed will save us again,” major indexes like the S&P and the Dow have held up under the pressure – but for how much longer?
It’s pretty much a given that China isn’t revealing the full extent of the virus’s impact. You may have heard that the officially reported number of confirmed new daily cases in China jumped from around 2,000 on February 11 to 14,840 on February 12, while the number of new daily reported fatalities suddenly vaulted from under 100 on February 11 to 242 on February 12.
Evidently, China had been omitting cases in which the patients “tested positive for the virus but have no symptoms”; moreover, they were classifying a large portion of the deaths as “by pneumonia” rather than “by coronavirus.” I only need for someone to lie to me once before I question everything they say, so I have to wonder whether the “revised” numbers are still grossly underestimating the reality of the situation.
While the Communist Chinese government might be able to suppress the numbers, they can’t hide the toll that the virus is taking on the tourism industry, Chinese factories, and international shipping. In the wake of this black-swan event, the Baltic index, a well-known gauge of international shipping activity, sank to its all-time low:
Courtesy: Baltic Exchange, IndiaTimes.com
This important metric literally went negative, a heretofore unheard-of event. At the same time, factory orders in Germany fell to their lowest level since September of 2015 as talk of recessionary conditions crept into the financial headlines.
The question, however, remains: why hasn’t this impacted the U.S. stock market yet? Much of the market’s resilience has to do with Wall Street’s elitism, plain and simple – the ultra-wealthy move the markets and they’re not particularly concerned if middle-class and poor people get sick or die from the coronavirus.
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The disease hasn’t landed in their backyard yet, so they’ve decided that it’s none of their concern. While Chinese new-apartment sales declined 90% year-over-year during the first week of February and existing-home sales fell 91% in eight Chinese cities during that time frame, Wall Street billionaires remained ensconced in their protective bubble of apparent safety.
Economies abroad are reeling but the market makers remain complacent because much like Pavlov’s dogs, they’ve been trained to buy price dips of all sizes. After all, the stock market recovered quickly after the 2003 SARS outbreak; never mind the fact that the coronavirus is already worse than SARS and that it’s practically impossible to prevent Wuhan’s population of roughly 11 million people from spreading the virus all over the world.
And then, of course, there’s the Fed. America’s central bank has promised to bolster the stock market through “aggressive” implementation of fiscal policy measures – specifically, “not-QE” bond purchases and suppression of the federal funds rate upon which other interest rates are based.
“I’ve got your back no matter what” is the message that Federal Reserve Chairman Jerome Powell is sending to the Wall Street elite, and they’re taking Powell at his word. With the 10-year U.S. Treasury bond yielding around 1.5% or 1.6% per year, however, there’s only so much more room to cut and each successive interest-rate cut will likely provide diminishing returns.
Regarding government-bond purchases, the Federal Reserve has already bought $400 billion worth of them in the past four months and recently vowed to continue this practice until at least April. Thus, they’re going to throw everything plus the kitchen sink at this problem in hopes that it will just pass.
But informed investors know that the coronavirus won’t just pass and that the American economy remains particularly vulnerable. As economists at Northern Trust explain, manufacturing is an international, interconnected, and interdependent ecosystem: “The inability to get parts from China has idled plants in Europe and North America… Global manufacturing, which has been struggling amid trade frictions, is likely to remain in retreat for a good portion of 2020.”
Thus, the lack of anxiety on Wall Street should itself be a cause of anxiety. The question of “how long” cannot be answered with any measure of certainty, but I can assure you that the questions of “how bad” and “how deep” are ones that the unprepared will have to face soon enough.
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