February 28, 2020
Sneezing Supply and Demand
The markets continue to shed value as COVID-19 infections increase around the world. As I mentioned in my earlier blog, The Tiny Bug with the Big Bite, the illness is not particularly deadly, but it is a new virus for humans, and as such, no one has immunity. Moreover, this virus is very adept at finding new human hosts.
In an effort to stem the rate of infection, quarantines of millions of people have been instituted, and travel bans employed. Business and production have come to a stand-still, creating economic shocks in global economies that were already fragile. We are seeing these impacts now in the financial markets.
There are two fundamental shocks happening:
1) a supply shock, due to the stoppage of production, and
2) a demand shock, as people are quarantined and events and travel plans are cancelled or postponed.
While economic shocks can be either positive or negative, this time both are negative.
Can central bank policy help stem the fallout?
Maybe. They could make an emergency rate cut, but it may not help much. That’s because while lower interest rates may help make lending more attractive and improve liquidity in the system, this cannot stimulate supply and demand when factories and businesses have no employees at work, and consumers are stuck at home and not out spending money. Lower rates will alter the valuation metrics for stocks, and might provide some price stabilization, but there is no hiding from the hit to companies’ profitability due to disruptions caused by the COVID-19 outbreak.
More extreme measures, such as the Fed’s TARP (Troubled Asset Relief Program) system, may provide some benefit, but the political ramifications of this tool would be problematic in an election year. It’s hard to know where the Fed stands, but it appears they are reluctant to provide any policy changes at this time.
When will we find a bottom?
Unfortunately, it looks like the markets will stabilize only when the infection rate itself begins to stabilize, and/or when an effective vaccine is available. Depending on how fast this outbreak spreads and long it lasts will determine what kind of economic damage we’ll endure.
I’m hopeful we are looking at virus with a shorter life span than otherwise, and if you can trust the information coming out of China, it seems they have been successful at slowing the rate of new infections. And if that is the case, and the rate of infection stabilizes sooner rather than later, I think we’ll see a healthy rebound in the financial markets.
As always, please feel free to reach out to me directly if you’d like to talk more about this situation, and to hear how Sonder might be of service.
Renée N. Duba