A Rising Fear Index
But this market adjustment wasn’t unexpected—or at least, it shouldn’t have been. In fact, given the rapid spread of the disease and the conflicting information about its source and infection rate, the markets could have understandably corrected sooner. Perhaps the unreliable information about the disease was the reason for the market’s delayed reaction in the first place.A Powerful Dynamic
The dynamic of this pandemic is simple but powerful. As ground zero of the COVID-19 outbreak, China’s economy is struggling to get back on track. With millions of people still not returning to work, some factories are falling behind in their production schedules.That may well be the understatement of the year. Many workers, fearful of contracting the easily transmissible disease, are choosing to stay home. But if workers don’t show up at the factory, their families go without. It’s a difficult dilemma for everybody.
A Global Business Slowdown
Of course, this slowdown is impacting the supply chains of businesses around the world. As a result, major market leaders are announcing slowdowns as well. Japanese automaker Nissan, for example, has closed its factory in Kyushu due to lack of parts coming from its Chinese supplier. Apple has closed some of its Chinese stores and announced that the company will not meet expected quarterly revenue targets.But it’s not a decision the conference sponsors wanted to make. The problem is that companies are cancelling their plans to attend these big conferences. That’s not only a loss of revenue for the host cities, but also for the companies that would normally attend, because many business deals that result in many millions of dollars in revenues begin at such conferences.
Will the Fed Do More?
If the markets continue to decline, however, the Federal Reserve may decide to cut interest rates or increase its quantitative easing programs, or both. It could even go further to support the stock markets by directly purchasing shares, but only as a last resort.That would likely only delay the inevitable deflationary pressure, not eliminate it. Eventually, the market will correct, and adding more liquidity to an already inflated market will likely make the correction worse.
For another thing, free market capitalism responds to challenges by finding solutions to them. That means that there are great opportunities in the markets, too, not just risk. The market will handsomely reward any company for finding a vaccine for COVID-19.
Other market opportunities may emerge as well. Medical supplies that are made domestically, for example, may do well if the contagion persists. With a persistent and growing shortage of masks, and other related items in China and other impacted areas, the opportunity is there.
Of course, if the situation continues to worsen, if the pandemic continues to spread to the point where many millions or tens of millions are losing their lives, then the market will be the least of our worries. That’s not prediction; just an acknowledgment that we’re not always as in control of our world as we presume to think we are.