How coronavirus hits markets | Charts that Count

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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 happened 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.