The United States stock exchange has dropped into bear market territory. There has been a sustained downturn in the US stock market for the first time since Donald Trump became President in 2016. Wall Street is the benchmark in global stock markets. Since the beginning of the coronavirus crisis, nearly $6 trillion has been wiped off global stocks. This is worse than the 2008 financial crisis, and there is no end in sight.
Then, in Mr. Trump’s address to his nation last Thursday, the intended effect of calming fraying nerves backfired. The address, far from being a presidential calming of the nation, was his usual defence of a dubious status quo, blaming outsiders for the coronavirus.
The stock markets, instead of stabilising, plunged further into bear territory, losing hundreds of billions of dollars. The president went as far as banning travel from Europe for 30 days, and he later said the United Kingdom would be added.
A stimulus package that included proposed tax cuts and market intervention by the Federal Reserve, creating $1.5 trillion to strengthen a tanking financial system — much more than the injection of the $800 billion then President Barack Obama asked the Feds to put into the banking system in 2008 — failed to lift the market.
This injection of financial capital initially lifted markets. But by the end of the trading day, markets dropped back down into bear market territory. With coronavirus, stimulus will have no effect until worldwide fear dissipates. That is very unlikely at present.
Lack of stability
Investors, who ultimately drive and control the markets, may be risk takers. However, there must be specific markers of stability and certainty in the marketplace. These are conditions that are specific and measurable, allowing for the efficient operation of the trading floor, such as a stable banking system, political stability, sustainable economic growth and national security, which in turn drive consumer and business confidence in the institutions that govern society.
The problem with the coronavirus is that it has turned certainty upside down. Instead of certainty there is uncertainty. In other words, the markers that decide the sustainability of business and financial investment are as unpredictable as the spread of the virus. With every announcement on the spread of the virus, investors get jumpy.
For the past 11 years, stocks have been in bull market territory. This is the longest rise in stocks in recent history. It practically guaranteed Mr. Trump’s re-election. That second term, however, is presently very much up in the air owing to the present pandemic and resulting economic crisis.
In bull markets, the prices of stocks rise year after year. This rise in stocks is a matter of investor confidence. Rising stocks are driven by investor confidence. Economics is first and foremost human behaviour. Belief and faith are major components of economic theory and practice.
When that faith in the markets is destroyed, usually by some external shock to the system, a bear market is the result.
The overall market index — a spread of stocks used as a measure of the value of the stock market — falls over a sustained period of time, historically up to 20 percent of the total market value of stocks.
That fall of over 20 percent of total stock market value is sustained, and further falls are expected. A bear market foretells what will happen in the wider economy.
In the supply-sided economy, a sustained fall in the share price is a traditional marker of failing business and consumer confidence. And that is what is taking place.
When investors get nervous, consumers follow suit. As investors pull back from spending on their supply chains, banks stop lending for fear of bad debt driven by layoffs and bankruptcies, and consumers zip their wallets in fear. Bad debts increase, and falling revenues impact cash flow, increasing financial leverage in the markets.
With every announcement by health officials of the spread of the coronavirus, fear takes hold, and both market and business confidence take a hit.
Then, consumers — a critical component of markets — run scared. Consumers in the age of coronavirus are being fed by the global press a diet of bad news and more bad news. The result is a further fall in business and consumer confidence. This pessimism becomes a self-fulfilling prophecy. The result is recession.
Consumers and business owners are fearful. People read in the news that cruise ships and aircraft are incubators of the virus. That kills travel plans and that in turn drives the cruise ship, airline and hotel industry into the ground, with job losses and bankruptcies.
In the wider market environment, announcements of school and college closures — and shutdowns of institutions and organisations — further exacerbate falling public confidence.
The result of the preceding is a persistent downturn in both the financial and business markets. The end result is recession.
The problem with a biological crisis like the present pandemic is that it is not easily controlled by forces that are under the tutelage of governments, financiers, administrators, managers and investors. No one can tell how coronavirus will pan out until the virus works itself through. As the pandemic gets worse, so do pessimism and fear.
The greater the fear and terror, the greater the bear market; and the greater the bear market, the greater the likelihood of a prolonged recession.
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