On Monday evening, Apple warned its shareholders about the impact of the new coronavirus outbreak. The production of iPhones has been slow because of the quarantined workers, and as the country draws on this problem, the company expects to sell fewer products in China.
Revenue, Apple Said, Would take a hit, though he wasn’t ready to guess how big it was. It seemed like a warning from a core of $ 1.3 trillion worth of companies and investors’ portfolios, which could garner much of Wall Street’s sales motivation. After all, if Apple’s supply chain wizards can’t keep things because of the coronavirus, what else could cause problems in the global economy?
Wall Street, however, largely ignores it in the end. The S&P 500 dropped 0.3% on Tuesday, only to recover all that ground and more Wednesday. After the trade ended on Wednesday, even Apple stock was almost recovered where it was before the announcement.
It fits in with a pattern: The stock market has barely reacted despite the fact that countless Chinese factories are sluggish, despite fears that workers will fall apart and the virus can spread more widely and cause further economic chaos in Asia and beyond. The S&P 500 has actually risen 5.6 percent from its level in late January, when the World Health Organization declared coronavirus as a global health emergency.
Even the most directly-publicized American companies in the Chinese economy hold the shares fine. The Dow Jones Travel and Tourism Index, which includes airlines and hotel chains that will see a drop in Asian tourism, has dropped just 1.2 percent from the middle of January when the Coronavirus fears began to take shape.
This upbeat mood in the stock market has continued even as economic forecasters in 2021 lowered their estimates for global growth and warned that spreading trade to the affected regions could cause major damage to the global economy.
For example, Moody’s Investors Service this week described a baseline scenario in which the virus was in the first quarter. If that happens, the economic loss will likely be limited to temporary interruptions and chain supply and tourism supplies. But the company also raised the possibility of something more damaging.
“Moody’s analysts write,” If the infection rate does not continue and the death toll is steadily increasing, the global economy will be deadly. “China’s importance and interconnectedness in the global economy will have a global impact on China’s expanding closure. The response to the financial markets seems to have largely removed the impact, which can reduce risk.”
At first glance, it may seem that there are only two possibilities: valuations like those are too lax, or fail to integrate any major risk of the stock market outlook. But when you look at the full range of data, there is one more way to reconcile things.
Bond markets have been noticeably disappointing compared to the stock market, yields on ten-year Treasury bonds have dropped from about 1.5 percent in mid-January to 1.57 percent on Wednesday. This suggests bond investors have lower growth in the years ahead, and therefore lower interest rates.
And two-year Treasuries are only earning 1.43 percent, well below the current target for the Fed’s overnight interest rate of 1.5 percent to 1.75 percent. By this, investors think the Fed will likely cut interest rates again this year
The coronavirus is part of the cause. Minutes of the Fed policy meeting in late January released Wednesday said that “the threat of the coronavirus, in addition to its humanitarian toll, had emerged as a new threat to the global growth outlook, which participants agreed to intensive monitoring.”
In fact, stock investors seem to be betting that the Fed will protect them from corporate gains from the virus and the damage it can do to the global economy. Reducing a Fed rate would mean cheaper, and so large companies doing business in China or other affected countries would support higher stock valuations, even in an environment that had to stop production or absorb lost sales.
This is a believable story. But it also points to a major concern about the valuation of all types of financial markets in the eleventh year of economic expansion.
The stock market is hitting new highs, but that has required frequent changes by the Fed toward easy money – last, summer and fall. In those days, trade wars and other global factors seemed to put the US economy at risk of recession, and the Fed reduced its core interest rate three times.
The rate cuts did their job, the financial markets returned after some summer turmoil and now the US economy seems Be on the cruise
But the Fed is facing very real problems that interest rates are so low even at the best of times that the economy takes a significant turn for the worse if there is very little room to run.
Its target is just above 1.5 percent interest rates, and if the Fed needs to cut back a bit to protect the United States economy from a virus outbreak in China’s Wuhan city, it has less power to deal with some potentially major catastrophe.
Applying monetary policy power to counter a potential epidemic, in other words, some will leave the central bank with less ability to fight future, unknown challenges.
So despite the risk of coronavirus, stock investors who are bullish are virtually making two big bucks instead of one.
First, they are betting that the Fed can and should do what it needs to when the virus starts to do real harm to the economy. Second, if this happens, they are betting that the Fed’s vicious ability to deal with future shocks will not be a problem.
If you think the world is at risk in the years ahead, economic disruptions from the coronavirus should be just the beginning of your concern.