On Monday evening, Apple warned its shareholders of the effects of the new Corona virus outbreak. IPhone production has slowed due to quarantine workers, and the company expects to sell fewer products in China as the country addresses the problem.
Revenue, Apple He saidIt would take a hit, though he was not prepared to estimate its size. That kind of warning seemed to be from a $ 1.4 trillion company and a mainstay of investor portfolios, which could inspire Wall Street sales. After all, if Apple’s supply chain processors are unable to keep things going because of the Corona virus, what other problems might arise in this global economy?
But Wall Street, in the end, mostly ignored it. The S&P 500 fell just 0.3 per cent on Tuesday, only to regain all that high and more on Wednesday. At close of trading on Wednesday, Apple shares recovered even from before the announcement.
It fits with style: the stock market barely reacts despite countless idle factories in China where workers are quarantined, and despite fears that the virus may spread more widely and create more economic turmoil throughout Asia and beyond. The S&P 500 actually rose 5.6 percent from its levels at the end of January, when the World Health Organization declared the coronavirus a global health emergency.
Even the shares of American companies most exposed to the Chinese economy hold up well. The Dow Jones Travel and Tourism Index, which includes airlines and hotel chains that will suffer from a decline in Asian tourism, has fallen just 1.2 percent since mid-January, when concerns over the spread of the Corona virus began to spread.
This booming state of the stock market continued even as economic forecasters lowered their forecasts for global growth in 2020 and warned that in less likely but more bleak scenarios, the global economy might face a major blow as trade faltered in the affected areas.
For example, this week Moody’s Investors described a basic scenario in which the virus was contained in the first quarter. If so, the economic damage is likely to be limited to temporary unrest and to supply and tourism chains. But the company also raised the possibility of something more harmful.
“The losses to the global economy will be severe if the casualty rate does not subside and the death toll continues to rise,” Moody’s analysts wrote. “The prolonged shutdown in China will have a global impact given the importance and interconnection of China to the global economy. It appears that the financial market’s response has been mostly ignoring it, which may reduce risk.”
At first glance, it may seem as though there are only two possibilities: valuations like that are very depressing, or the stock market fails to incorporate a significant risk to the outlook. But when you look at the full set of data, there is another way to reconcile things.
Bond markets looked more pessimistic than the stock market, as the yield on 10-year treasury bonds fell to 1.57 percent on Wednesday from about 1.8 percent in mid-January. This indicates that bond investors perceive lower growth and, consequently, lower interest rates, over the coming years.
The yields of two-year treasury bonds yield only 1.43 percent, less than the current Federal Reserve’s overnight interest target of 1.5 percent to 1.75 percent. This means that investors believe that the Federal Reserve is increasingly likely to cut interest rates again this year.
Corona virus is part of the cause. “The risk of the Corona virus, in addition to human losses, has emerged as a new danger to global growth expectations, which participants agreed requires careful monitoring,” said the minutes of the Federal Policy Meeting in late January, released on Wednesday.
Indeed, equity investors seem to be betting that the Fed will save them from any damage that the virus might do to corporate profits and the global economy. Lowering the interest rate or two from the Federal Reserve would make money cheaper, thereby supporting higher stock valuations even in an environment in which the major companies operating in China or other affected countries are forced to stop production or absorb lost sales.
It is a plausible story. But it also points to one of the biggest concerns about assessing all types of financial markets in the eleventh year of economic expansion.
The stock market continues to reach new highs, but it has required frequent shifts towards getting easier money from the Federal Reserve to do so – the last of which was last summer and autumn. At the time, trade wars and other global factors looked at risk of pushing the US economy into a slowdown, and the Federal Reserve cut the key interest rate three times.
Interest rate cuts did their job, financial markets rebounded after some summer turmoil, and now the US economy appears To be cruising.
But the Fed is also facing a very real problem that interest rates are so low even in good times that there is little room to maneuver if the economy takes a big turn for the worse.
Target interest rates hardly exceed 1.5 per cent, and if the Federal Reserve is forced to further protect to protect the US economy from a shock from a virus that has emerged in Wuhan, China, it is less able to cope with some potentially larger turmoil near the home page.
In other words, using the power of monetary policy to combat a potential pandemic may leave the central bank less able to face some unknown future challenges.
So the equity investors who are still bullish despite the risks of the Corona virus are actually making two big awe instead of one.
First, they are betting that the Fed can act and act if necessary if the virus begins to cause real damage to the economy. Second, if this happens, they are betting that the declining Fed’s ability to deal with future shocks will not be a problem.
If you think the world is full of dangers in the coming years, the economic turmoil caused by the Corona virus should be just the beginning of your concerns.