The big surprise was not that global markets fell sharply this week on fears of the coronavirus, but that it took so long for them to wake up to the threat. Before Monday, Wall Street was full of instant experts in epidemiology predicting — on the basis of widely circulated charts showing the number of new cases had peaked in China — that “it’s over.”
This sanguine state was symptomatic of a bull market that is now 11 years old, the longest in history, and also one of the calmest. In the past decade, stock prices approached a full 20 percent “correction” only twice, and suffered even minor dips much less frequently than in most previous bull markets. Even insignificant market tremors were met with new offerings of easy money from the Federal Reserve, so every dip was greeted as reason to buy, and no global crisis seriously rattled the market.
Until last week, Wall Street was unusually blasé about the coronavirus too, and had reacted with far less alarm than it did during any of the eight global contagions since World War II. Not only had market players been lulled into complacency by easy money and the long calm of the bull market, but they also began this year in a state of unbridled optimism. The buzzword on Wall Street was “melt-up,” suggesting stocks could rise as fast in 2020 as they normally fall in a meltdown.
After all, the global economy was in an upswing when the coronavirus first appeared in December. The tariff war between the United States and China appeared to be ebbing. The threat to Wall Street implied by the growing popularity of a socialist candidate for the White House was simply dismissed by investors who, surveys show, give President Trump a 80 to 90 percent chance of re-election.
By noon Monday that all changed. Amid reports that the coronavirus has now spread well beyond China and that Beijing may lower its guard and ease its quarantines, the American market suffered its worst day in two years and ended down by nearly 5 percent from its peak last week. That drop is now right in line with the average at this stage of the eight postwar contagions, which go back to the Asian flu of 1957. Markets are worried — but as the doctors would say, within normal limits. By Tuesday morning, a semblance of stability was returning to global markets.
What happens next depends in part on the impact to the global economy. The latest estimates suggest that the hit from the coronavirus could make the first three months of 2020 the slowest quarter for global growth since the crisis year of 2008.
If the past is any guide, however, the growth scare should be relatively brief. Recent global contagions going back to the SARS virus in 2003 have seen a sharp slowdown lasting about a quarter, followed by a sharp recovery over the next quarter. That’s why the consensus on Wall Street is that there will be no global recession, and within six months the whole scare will be over.
Still, the quarantine of 16 cities in China has had a visible impact on economic activity, reducing traffic on roads, railways and at airports, emptying out theaters and other public spaces. Analysts skeptical of official Chinese data have started to track alternative sources, from satellite images of road congestion in urban areas to the density of smog over Hong Kong and traffic on Chinese search engines. All those unofficial trackers also point to a hard hit.
Beyond China, however, the economic impact will vary from nation to nation, depending on how much stimulus a country can afford. Already Beijing has been cutting interest rates and encouraging banks to increase lending. Investors are confident the authorities will do whatever it takes to keep the economy moving. That is one reason, despite the fact that China is ground zero of the epidemic, markets have held up better there than in other developing countries.
The same is true of the United States, where investors still seem to trust the Federal Reserve to keep growth alive, come what may. The American stock market has also fallen less than the global average. The hardest hit countries will be those with less wherewithal or inclination to spend more money. High in the at-risk category: Japan and Italy. Japan is now battling to prevent the coronavirus from disrupting the summer Olympic Games in Tokyo — even if it means locking down an economy that is already technically in recession.
Whatever course the coronavirus takes, it is already accelerating de-globalization, which began when countries turned inward after the global financial crisis of 2008 and cross-border flows of people, goods and money slowed. Fear of contagion is likely to deepen the conviction of populist politicians who want to erect barriers to block imports, immigrants and cultural influences at the border anyway.
The trend toward localization — companies looking to produce more locally, and consumers looking to buy from local brands — was getting underway and is likely to pick up speed. Perhaps most clearly, the roster of manufacturers who are moving factories out of China, in search of lower wages and a more friendly business environment, is likely to grow after this episode.
The longer the virus lasts and the farther it spreads, the bigger these impacts will be. Hopefully, the consensus view among investors is right and this epidemic peaks and passes quickly. But one thing coronavirus has already shown is that Wall Street’s medical opinions always need to be read with caution.
Ruchir Sharma, author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” is the chief global strategist at Morgan Stanley Investment Management and a contributing opinion writer. This essay reflects his opinions alone.
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