Today, we're going to talk about why the coronavirus has
had an effect on markets, and what it
means for the global economy.
Now, the coronavirus is the outbreak
that's been happening primarily in China,
but cases have been popping up all
over the world at this point.
Unfortunately, the cases and the death toll continues to rise.
Markets that have been affected have
included both US domestic equity, as well as
international equity.
It's affected bond markets, commodities, currencies.
This virus has basically... it's created fears in all of those
different markets.
So for example, government bond prices
have gone up because a lot of people
are putting money into those bonds.
Because they think, hey, government bonds are safe.
Things are looking risky.
Let's pile into that.
On the other hand, you have oil taking a hit on its price.
Because people think, well, travel is being restricted.
A lot of airlines and countries are restricting travel
to China.
And so that's going to bring down
demand for fuel, which is going to bring down oil prices.
And that has had an effect on energy bonds,
which have taken a hit.
You have other markets that have taken hits,
like currencies in countries that do a lot of business
with China, copper prices.
Now people are saying perhaps steel prices
will be affected, because you could
see a slowdown in construction in China.
Basically, there is nothing that this virus
hasn't affected so far.
And I want to talk about how concerned do we need to be?
Well, the short answer is, nobody really knows.
Because we don't know how long and how big of an effect
this virus is going to have.
Now the most recent virus that people are comparing this one
to was the Sars virus, which took place in China as well,
in the early 2000s.
There's a lot of reasons why though that that virus differs
from today, and I think the primary reason
is that China's economy is much larger than it was back then.
And China has the second largest economy in the world,
and that is why people are so concerned
about the global effects of the virus.
Because basically, when people are staying in
they're not going out to eat.
They're not going shopping.
A lot of US multinationals have shut down stores in China,
like Starbucks and McDonald's.
All of that is contracting their economy
when people aren't spending money and doing
things that stimulate it.
And the other aspect of that is that, yes, Chinese consumers
buy a lot from external countries,
but also a lot of countries have at least part of their supply
chain manufactured in China.
So Apple, for example, has come out and said,
you know, this coronavirus is probably
going to have an effect on our products, on our supply chain.
And so that is kind of the reason
why markets have taken a turn.
Now you'll notice, if you look at,
for example, the US S&P 500, that things
took a turn on Monday, and since then
have come back up a little bit.
And I think that is a perfect example of this concept
that nobody really knows what's going on
or what the effect is going to be.
And it's important that we point that out,
because prices of things, assets are supposed to be valued
based on their fundamentals.
But in reality, prices can shift on a whim just based
on investors' own emotions, and so that's
important to keep in mind.
Now the potential for something, like a virus,
if it were to turn into a pandemic,
would constitute something called a black swan event
potentially, which is basically just another way of saying
a big event that you don't expect
that has a negative consequence on the prices of assets.
And that is a theory that some people
have as to why it's really hard to understand risk in markets.
Because, for example, the financial crisis of 2008
is considered an exemplary black swan event, because nobody
really saw it coming.
And the ability to price that kind of crisis
into your portfolio is very difficult to do.
Here's where I want to give a little bit of positive news
though.
On this chart, which comes from JPMorgan,
we have four prior big illnesses and the effects
on their markets.
So the red box refers to basically the time
of the crisis, right?
And then the blue box is one month post crisis,
and green box is three months post crisis.
And the measurement is the percentage change
in each of these markets over time.
So this one refers to China, and we're using the MSCI indices.
So as you can see from the MSCI indices
in each of these regions, obviously, three of them
are countries.
One of them is a continent.
But basically, during the outbreaks, markets fell.
One month and three month post outbreak, things recovered.
Will that happen with coronavirus?
I don't know, and really, nobody knows.
But it's important to remember that these are real people,
and they're not just numbers being affected by this virus.