Many are wondering what the effect the coronavirus will have on the global economy. To me, the answer to this question is not important.
Instead, we should know what is taking place since we see it unfolding before our eyes.
The full effects of the virus are still unknown. What is known is the fear associated with it. This is the only thing that matter since it is truly what drives markets and economies. All the rest is just noise from an economic perspective.
Sentiment is a factor that needs to be watched closely. When people feel optimistic, they are likely to spend money. Their outlook of the future is bright hence are less apt to hold onto what they earn.
The exact opposite is true. When individuals are fearful, they take measures to protect themselves. One of these is to cut out unnecessary expenses in hopes of stockpiling for a "rainy day".
Over the last couple months, we saw the fear of the virus spread. Whether this is warranted or not, at this point, remains to be seen. However, the financial impact is already being felt. Fear does not breed an expansive economy. Instead, we are looking at a setback, the question now being how large.
Media entities love to spread fear and sensationalism. I had a debate with a friend of mine the other day. He is a news follower believing that only the fringe news organizations make stuff up. Over the years, I told him how it is all propaganda yet he does not believe it.
What is ironic is living in a hurricane zone, we know the sensationalism first hand. After a hurricane, the media goes through looking for damage. They focus upon those areas that are worst hit and blast that all over the airwaves. Most times, this is nothing but an agenda to drive ratings. It is not factual. Sure, the area they are focusing upon was hard hit yet it was an isolated incident. Travel a half mile down the street and it is like nothing happened.
In my view, we are seeing the same thing here. As stated, this could be a very big deal, I have no idea. Nevertheless, so far, less people were killed by this virus than the normal flu. Certainly, the prospect of coronavirus surpassing it is possible but it is best to keep things in perspective.
Unfortunately, I think for economies and the markets, it is too late. Supply chain disruption already is taking place. The fear associated with the virus might end up killing more people than the virus itself. For example, most people are not aware that a vast portion of the components for medications are produced in China. What is going to happen when people cannot get their heart medication? How many people will that kill?
There are only a few weeks left in this quarter. It is likely that the earnings reports throughout the second quarter (for Q1) will be horrible. When an industry like automobiles is facing a global downturn of over 10%, that is going to have far reaching consequences.
Markets can move against fundamentals. That is sentiment driven, albeit often different from that of the consumer. Money managers are looking for entry points and there could be a time when things are viewed, at least temporarily, as too cheap.
The economy is much slower. Thus, if we see sentiment shift, especially in the United States, it will take some time to reverse course. This could thrust the economy into a recession. It is likely that China is going to be negative for this quarter at a minimum. With the 3rd largest economy, Japan, struggling, that would put the top 3 in the toilet.
On a sector basis, it is obvious that some are getting crushed. Airlines, hotels, and anything associated with travel is going to have a tough time in the near future. This is also spreading as manufacturing companies are facing supply shortages.
We are about to see how resilient the economy truly is. Over the past decade, it fended off most that was thrown at it, with the help of the central banks giving lots of money away. Now, with a major deflationary spiral in front of us, it is situation for which the big wigs are powerless to control.
When fear takes over, the only direction is for things to head down.
If you found this article informative, please give an upvote and resteem.
Posted via Steemleo