As Covid-19 (Novel Coronavirus) continues to spread through the global system, and increasingly through U.S. metros, the financial markets have certainly taken notice. Volatility is on the rise and major indices have dropped as much as 11% over the course of this week. Many practitioners, government officials, and pundits have attempted to downplay the Covid-19 outbreak – arguing that the volatility of the market is the result of an overzealous media. The Federal Reserve, in typical fashion, cut interest rates in an attempt to stimulate the economy. It didn’t work.
So, why is the market reacting with such profound volatility? Because this is about more than finance. Contrary to popular belief, investors are not guided by the notion of lower rates being equivalent to higher market caps. As Sina Kian puts it in his recent Politico article Coronavirus: The Real Reason the Markets are Worried – “They’re worried about the human and economic costs of the virus itself. “
It’s Not About Monetary Stimulus
A phrase that is often thrown around in finance is confidence and what we’re seeing from investors in the financial markets is a lack of it. Confidence is not solely tied to stock performance in the literal sense, confidence also relates to the ability of public and private sector leaders to manage a particular set of circumstances. Up to this point, confidence in Washington has been shaken. The market (in aggregate) is looking for signs that the crisis can be addressed in a competent manner. There is nothing artificial stimuli, such as rate cuts and quantitative easing, can do to prevent the spread of a virus and that’s why these schemas have failed thus far.
The market, vis-a-vis it’s participants, is seeking tangible solutions to tangible problems. How will the government contain the outbreak and address existing cases? What is to be done about disruptions in global supply chains? How should reductions in revenue streams in key industries and in key companies be addressed in the midst of a black swan event? These are complex questions that cheap access to capital cannot comprehensively address.
This is a rare instance when public and private sector interests are in alignment and one in which public policy decisions will have a profound impact. Ultimately, the focus should lie on addressing the dynamics of the virus itself. This will begin to restore confidence in the financial markets and help bolster economic considerations moving forward.