It was media heaven last week as the headlines screamed about the worst week for investors since the global financial crisis in 2008. The Coronavirus has encapsulated the fears of investors; like the disease, they fear the spread and fallout in markets will ultimately lead to the next recession.
Policymakers around the world look to grapple with the consequences of transport and supply chain disruptions resulting from efforts to contain the outbreak. A degree of forbearance is needed for companies who have been affected the most from the global supply chain disruption. It is important that any policy response needs to be granular and specific, as the previous blunt tool of interest rates cuts will arguably not be sufficient in this instance.
The Federal Reserve is still the world’s most influential central bank and last Friday Jerome Powell issued a statement that has set expectations for resumption of interest rate cuts in the US. At the beginning of the year, the markets were pricing in just one interest rate cut in the US; this has now increased to three and will probably mean a rare cut during a presidential election.
In situations like this, the best cognitive course of action is to think of the extreme outcomes that may arise. There are two possible consequences from the Coronavirus outbreak: either it ends up being the pin to burst the economic expansion or it acts as a pump to prime the next wave of stimulus.
We would expect markets to continue to be volatile until the spread of the virus is brought under control and there are tentative signs that this is already happening. For investors, now is the time to hold your nerve and not be tempted into a knee-jerk reaction of selling your long-term investments in reaction to short-term market mayhem.