The stock markets ended 2019 on a strong note, with the S&P 500 advancing 30% for the year while the Nasdaq increased approximately 38%. With both indices trading at record levels, investors were hoping for more of the same in 2020. That is looking less likely right now. A Black Swan event, the coronavirus, has put all that in jeopardy.
A Black Swan event is something that is unpredictable and could have devastating consequences. The coronavirus certainly qualifies as a Black Swan event. And it could have dire consequences on the stock market and global economy.
What Is the Coronavirus?
The coronavirus became news at the start of 2020 when the World Health Organization (WHO) was told about a previously unknown virus with pneumonia-like symptoms in Wuhan, a city in Eastern China with a population of over 11 million.
Since then, the virus has infected more than 7,700 people worldwide. Most confirmed coronavirus cases are in China; just 68 have taken place outside mainland China. A total of 170 people have died, but the real number could be much higher.
While mostly (for now) confined to China, the respiratory infection has been confirmed in the U.S., Canada, France, Germany, Japan, Australia, South Korea, Finland, and United Arab Emirates.
While places like Canada and the U.S. are better prepared to deal with a pandemic now than we were during the 2002-2004 SARS outbreak, still, it is expected to take at least a year before a vaccine to protect against the new coronavirus is developed.
What Impact Could the Coronavirus Have on the Global Economy?
The outbreak of the coronavirus coincides with the Lunar New Year, a time when hundreds of millions of people travel across China and the world. A move that could help seriously spread the coronavirus. The outbreak has led Chinese authorities to partially shut down more than a dozen cities, quarantining more than 50 million people. Regardless, people are still travelling, which explains the global spread of the coronavirus.
Uncertainty around the coronavirus and how it will play out is wreaking havoc on the markets, with stocks and the bond markets. On Monday, January 27, the Dow Jones Industrial Average and S&P 500 posted their worst days since October with the Nasdaq down the most since August.
Even before the outbreak of the coronavirus, investors and analysts were expecting the stock market to experience some sort of correction. After all, we’re in a record bull run, and the markets need to take a breather at some point. Corrections, which translates into a 5% to 10% drop in the value of stocks, are healthy because they reset the market to some degree. Impossible to predict, but because the stock market is cyclical, we know one is inevitable.
A Black Swan event like the coronavirus could usher in a correction much sooner than expected. And because of the unpredictability of the virus and how it will impact the global markets, a correction could be worse than anyone expects.
After posting weak economic numbers, it was thought that China’s economy would rebound in 2020. That seems unlikely right now. As the second largest economy in the world, that will impact global economy growth.
At the very least, we can expect that stocks will experience near term volatility. It’s possible that hiring will slow down with businesses reevaluating their corporate initiatives.
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