At the start of the year, most investors expected the 11-year bull market to continue in 2020, only to be shockingly disabused of that notion by the spread of COVID-19. As a result, the Dow fell from record highs to bear-market territory in a matter of weeks.
Investors need a way to price in risk, and as of April 2020, there are simply too many unknowns surrounding COVID-19 for investors to predict the economic impact, leading to fear and extreme volatility.
COVID-19 Goes Global
COVID-19 has officially been designated a pandemic by the World Health Organization (WHO). It has gone global with cases in over 150 countries.
As of April 1, 2020, almost 900,000 COVID-19 cases have been reported worldwide with a death toll of over 44,000. Note that over 185,000 of the infected patients have recovered, and almost 3,000 fatalities have already occurred in the U.S.
China’s unprecedented quarantine of approximately 600 million people in their homes or hospitals has slowed the progression of the outbreak. At the epidemic’s peak in late-January and early-February, China frequently experienced over a thousand new COVID-19 cases per day, along with 100 fatalities.
Although still a relatively high amount of new cases emerged, this is drastically lessened compared to prior months. This is part of a long-term downward trend that gives rise to hopes that China nearly has the virus under control.
However, the spread in the United States, Europe and other regions continues to rapidly evolve. How long the epidemic will last and its economic impact is difficult to predict. As a result, the stock and bond markets have entered a period of extreme volatility, leaving investors to wonder: What does COVID-19 mean for the global markets and economy?
Impact Thus Far
The government, Wall Street and the American people want to see the virus contained. Until it is, risk assets remain vulnerable to additional selloffs. However, there are some bright spots. The outbreak has increased the demand for medical products, especially face masks and test kits in an effort to avoid spreading and/or catching the virus.
The news across other risk assets points to earnings weakness in the first quarter of 2020. For example, Nike relies heavily on China for its production, igniting fears of an earnings dip due to supply-chain disruption. Starbucks also had to shutter half of its 4,292 stores in China, and Apple has begun a search for alternative suppliers who can make up any production losses.
However, with China hitting its peak with new COVID-19 cases, the country continues to steadily decline its infected count. Apple CEO Tim Cook expressed optimism that the company’s Chinese supply chain is rebounding. Starbucks has reopened most of its locations.
While people all over the world remain quarantined, the…