When many savvy investors are sitting on large profits, it makes sense that they may sell some—or … [+]
AFP via Getty Images
The coronavirus has been in the news, but was seen by many as far removed from the United States. While we were collectively looking the other way, it seems that the virus outbreak has substantially escalated, particularly outside of China. It has only now just dawned on many people, politicians and business executives that the coronavirus must be addressed, as its impact could be devastating to both the human toll and the economy and job market.
Fears of a worldwide pandemic have been uncomfortably mounting. Reported cases are dramatically increasing outside of China. Recent reports in Italy, South Korea and Iran have garnered international attention. In Italy, there are pictures and video evidence of bare supermarkets, as panicked shoppers have picked the stores clean.
Skeptics initially claimed that the virus wouldn’t hurt the economy outside of China. For a while, they were somewhat correct, as the Chinese government pumped billions of dollars into the economy to sustain it. Even with the massive cash infusion, it can’t compensate for the new reality.
Millions of Chinese citizens are quarantined. Many are literally locked inside their homes and apartments. Travel is restricted and numerous businesses have closed. Workers are asked not to show up, or are just not showing up or need to be medically cleared before returning to work. If factories are closed or running at substantially lower production schedules, products are not being made. China is the second largest economy in the world. The U.S. and other countries heavily depend on the Asian country’s imported goods. China is mission critical in the supply chain. If factories are idle or workers don’t show up, there will be a global ripple effect. For example, if the manufacturing plants that build iPhones are shut down or are operating at a lower capacity, they won’t be made or shipped to America and other countries. This will result in fewer sales and significantly less revenue for Apple. Multiply this by thousands of other companies and you can imagine how everything will be impacted.
On Monday, the stock market fell in intraday trading, plummeting nearly 1,000 points, which represents more than a 3% drop. The U.S. stock market, as well as other international securities markets, have been on a red-hot run for several years. Many analysts have said the U.S. stock market is overvalued and the share prices have been pushed too high.
When many savvy investors are sitting on large profits, it makes sense that they may sell some—or all—of their holdings to lock in profits. If this is mirrored by others, there will be intense downward pressure, which pushes stock prices further down. Then, the news outlets will step in and amplify the loss in value, as they hype the dramatic drops and the amount of money people are losing. The average American—who doesn’t follow the stock market—will get nervous and might sell their investments that were targeted for retirement and college tuition for their children, in an attempt to avoid losing everything they have worked so hard for.
Companies seeing the ripple effects of the Chinese contagion will prudently watch over their finances. It would be reasonable for them to curtail hiring, as the future looks highly uncertain. If the outbreak keeps growing globally, with a rising death toll, corporations may start downsizing to cut costs and hunker down through potentially troubling times ahead.
There are two ways this could pan out. The first is the worst. The outbreak takes on further momentum and becomes a pandemic—or worse. This would be devastating both on a human and business level. The second option is a little more optimistic. Assuming that the virus will remain virulent, it could last for a while until scientists figure out a vaccine and cure it. The economy will cool down and stock prices will be down, but eventually they’ll turn around once this outbreak subsides and things return to normal.