The global system came under unusual and intense pressure over the weekend. New reports of quarantine against the coronavirus, a breakdown in OPEC negotiations about the levels of oil production, and an already tetchy financial market collided to produce a global stock market crash that as of this writing on midday March 5 has reached more than 5% worldwide. For a moment, downward trading Monday morning was so swift that all trading activity was halted. Equally tumultuous, yields on U.S. Treasury plummeted to their lowest level…ever, briefly flirting with 0.3% on the U.S. 10-year before recovering somewhat.
It would be nice to be able to say when this will settle down, but as the old market cliché goes, no one rings a bell when markets hit a bottom. We are clearly in a sudden and rapid reset of assumptions that until a month ago seemed reasonable: that the global economy would putter on growing modestly, that the U.S. economy might slow but would not stall, and that credit markets and interest rates would be low but also fairly boring. No one can really plan for a pandemic when it comes to investing and managing a business, and the cost of preparing can be equally dire as the costs of dealing once the crisis hits. There will be no dearth of second-guessing in the time to come, but unlike the financial crisis of 2008-2009, this is one of those times when things just unravel.
We have had market crashes before, of course, and anyone with a passing familiarity with financial markets understands in their bones that things can and very occasionally do get very, very bad. This is clearly one of those moments, where a global pandemic triggers a wave of uncertainty, a sharp and sudden pause in economic activity that is now rippling around the globe. Even as the virus subsides in China and life stumbles ahead, it is now intensifying in Europe, parts of the Middle East and now the United States. Without any definitive road map about how and when this all plays out, financial markets do what financial markets do, sell and ask question later and flee to assets such as government bonds that are perceived as the only port in the storm.
This has massive real-world implications. Pension plans, 401Ks, all sorts of retirement vehicles for millions of families lost value suddenly at just the moment where assumptions about business for the year ahead are rapidly being revised down. Individual and rational instincts dictate selling what you can and preserving what you’ve got, which then compounds a selling frenzy that is already hyper-charged by algorithms and computer-drive trading that are acting based on market momentum rather than fear or hope.
In moments of fear and panic, we all tend to scramble for the bottom and game out the worst. Every now and then in the course of history, the worst actually happens – after 1929, after 1939, 9/11, the financial crisis of 2008-2009. Perhaps this is one of those. But the most recent of that list, while it would be unwise to soft-peddle the tectonic shifts they caused, proved short and sharp, rather than the prolonged agony of the Great Depression or the horror of war. A global pandemic that kills 10 to 20 million people would certainly be wrenching, but given a global population of 8 billion and the fact that the vast majority of fatalities strike down those over the age of 60, it would not be on the order of the Spanish Flu of 1918 or of many of the wars that have beset us. This is not a system-breaking event—unless we allow it to become one.
Our financial system is treated as fragile creature by many, and in days like these, all of the doomsayers who have felt unloved have their moment in the sun. Their voices are heeded, and that then adds to the panic and can serve as further fuel. But even with 2008-2009, our systems have been more resilient than not, and even with the sharp spike in volatility in response to the real threat of the virus and its economic disruptions, that resilience should not be lightly discarded. Stocks in economically sensitive areas such as travel and finance and retail sales are trading as if a sharp and lasting recession is inevitable, while bonds are trading as if everything is heading toward zero. That is possible, but it isn’t probable. As difficult as it might be to imagine, panic will soon give way to realism, and realism about what the virus is and is not will dictate more coherent and measured public, financial and political responses.
Financial advice columns will be full of the line “don’t panic” in the days and weeks ahead. Here’s a different strategy: panic. Let yourself succumb and envision the worst. But don’t act. Play out the scenarios and ask yourself if this is really it, the time when everything unravels and goes to pot. There is, as they say, only one end of the world, and this is quite unlikely to be it. Fear is a natural response, but so is stepping and looking at what has happened in the past, what is happening now, and what is likely to evolve in the days ahead. This feels unusual, and it is. But unless the virus itself is many times more lethal than we now know, the panic reaction is wreaking and might wreak just as much havoc. Financial markets are a lightening-speed barometer of those fears, but they can also be lightening-speed barometers of hope the moment sentiment changes. Last week, market see-sawed from hope to fear to hope and back to fear in massive moves. Be prepared for more of that; panic a little; buckle down; and try to remember that this too shall pass.
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