Stock Markets, Tariffs, Coronavirus

Question: if Trump hadn’t started a trade war with China, would the stock market have responded any differently to the coronavirus outbreak?

Caveats: I’m virulently anti-Trump, so I’d love to lay some of this at his feet. But I also try to be aware of my biases, and also of my ignorance, so I’m nowhere near ready to do that. I also know that this sort of counterfactual is impossible to prove.

What I’m interested in is informed speculation on the matter. Has the trade war decreased backup inventory, such that workplace stoppages from illness have more immediate effects on supply chains? Are heightened tensions more easily triggered into panics? Or are there countervailing forces that mean that without the trade war, the stock market would be even more volatile?

I really don’t know, and would love to hear some informed and well-cited opinion.

This article suggests that Federal Reserve policy is also gonna matter:

AIUI, the Federal Reserve has already lowered interest rates to near-zero. There have been cautions that they shouldn’t do so, since it removes their ability to respond to economic turmoil; but Trump has badgered them into keeping rates very low because it’ll keep the economy thrumming along.

You ask if the stock market would have responded differently - I’m not sure of your premise here. So far the stock market has not reacted much at all to the coronavirus outbreak, at least in terms of the major indices (including China).

It may be completely wrong, of course, and the economy may be about to implode - but the market consensus right now is that this is no big deal.

Have you watched the news today? Dow Jones is down 3.5%, and plenty of other markets are down as well.

Have you looked at a chart for 3 months, 6 months - any period you choose - to see how insignificant a drop that is? It has been a very modest reaction.

In the US or in China? If anything Chinese inventories were above normal. The annual build-up of inventory to cover the impact of Chinese New Year being one factor.

Undoubtedly.

Intuitively, if economic growth was curtailed, then the impact of COVID-2019 off a smaller base would be less.
There’d be more volatility if the markets were betting on a truce in the trade war, and therefore were gearing up for resumption of “normal” trade when COVID-2019 impacted the supply chain.

This is standard monetary policy thinking from the Central Bank’s playbook, but that book was written before policy setting of negative interest rates became an serious option.

I agree that it’s premature to declare that the market has reacted in a major way to the coronavirus outbreak. That said, I believe quite strongly that the market has not been pricing risk effectively since - well, for a few years now, but in particular since the outbreak started causing a major world economy to shut down major cities. If the market shrugs off this drop and continues its climb upwards, then you will have been right. But I think LHOD’s question - whether or not there is intersectionality between Trump’s trade war and the pandemic shock - is quite interesting if you presume that today’s drop is more than a temporary blip. I don’t have much to offer on the specific question at the moment, but if I can get some free minutes, I might try doing a bit of digging.

While some details might differ… no. Not really. It was inevitable that an epidemic fucking up the Chinese economy and manufacturing was going to screw with the economy of the rest of the world.

How can it ever be premature to declare whether the market has reacted? We can see where it’s trading right now. It’s an objective fact that it has not reacted very much.

I will be neither right nor wrong, because I made no prediction. I just stated that the market has not reacted significantly, implying that the market consensus at present is that this is no big deal.

That wasn’t exactly LHoD’s question. He seemed to start from a premise that the market was in chaos, and asked if there would have been less chaos without Trump. I rejected his premise that the market is in chaos. Right now, it’s not.

Now, we can have a discussion about whether the market is pricing the risk correctly, but let’s be clear to distinguish factual reporting on the state of the market and our opinions on whether the market is wrong.

Perhaps everyone reporting on today’s drop is overreacting. But it looks more to me like you’re underreacting. Shrug. You don’t think the question is interesting. Noted; moving on.

Dow plunges 1,000 points, posting its worst day in two years as coronavirus fears spike
U.S., global markets plunge as coronavirus cases spike outside China
Global stock markets plunge on coronavirus fears
Markets ‘powered through’ SARS, but the coronavirus outbreak is different, Cowen says — and here’s why
Stock market news live: Wall Street dives on coronavirus panic, stocks have worst day in 2 years
U.S. Stocks Plunge as Coronavirus Crisis Spreads

It’s not like I’m making this up.

That’s generally what I’ve read from economists. Two things are generally relied on in capitalistic economies when there is a downturn in the economy, interest rates are lowered, and they borrow more. Trump did this when the economy was already stabilized. Most he got was for one year 2.9% GDP (same as Obama), last year was 2.3%, and trillion dollar annual deficits back on the rise. And he’s also pushing for negative interest rates next.

Questioning the facts of your premise has nothing to do with whether I think your question is interesting. I think the question of the impact of the pandemic on the world economy is extremely important.

But getting away from today’s scary headlines (you always get them on down days) these are the facts:

S&P 500 on Dec 31st = 3231

News of the outbreak in Wuhan starts to come out in the first week of January

S&P 500 at today’s close = 3226, unchanged from Dec 31st

So I think the right way to frame the question is to ask why the market has thus far reacted so little to what could be an economic disaster. I think it’s quite odd, and I am surprised that the market in the U.S. isn’t down 10% on the year, and in China 20%. Even China is only down a few percent on the year, or back to where it was mid-December.

Being a property developer, having a business model of being in hock to the gunnels, the prospect of negative interest rates would be the very definition of money for jam.

The stock market jitters have nothing to do with trade wars; they’re a reaction to concern that global supply chains have been disrupted, as well as the concern that the second largest economy could be headed to some serious economic problems. Many small Chinese businesses operate with about a month’s cash on hand. If there’s a weeks-long disruption in consumption, production, and trade, that’s a serious blow to the Chinese economy, and that would bring pain that would linger well beyond the coronavirus season. China’s banks have already used a ton of stimulus to deal with the trade conflicts, so in that sense, yes, the trade wars are a problem in that China’s chief tool to deal with this problem has already been used to deal with tariffs. But COVID is a problem by itself.

A few days ago the outbreak was mostly confined to China, with the expectation that an in-control Chinese government could limit the effects of it.
Yesterday it was in Italy, and no one has ever accused the Italian government of being in control.
Last week the news was of Chinese manufacturing starting up again. If it does, and the virus spreads, then there will be an even more significant impact on the supply chain.
Asian tourism is way, way down. What’s the impact going to be on countries that depend on Chinese tourism?
So the question is, whether traders are going to see the market as a bargain, and buy, or will they wake up to the possible impact, and keep selling? If the former, then this drop is insignificant. If the latter, this could be the start of something big.
I sure don’t know. If I did I’d be rich.

The current fed funds rate is about 1.55-1.60 IIRC. It’s not zero, and it’s not negative rates, but it’s hard for the banks and people saving for retirement to make money on cash in vaults. Trump wants negative rates because, well, he’s forever in debt - go figure.

We can lower interest rates, but that would only push us deeper into a hole in the long term.

The real problem with the Trump economy is that it’s only working for the economic elite.

Unemployment is at 50-year lows. Yay! How’s labor participation? How’s inflation for consumers?

We have wage growth? Yay! But why isn’t that wage growth translating into more purchase power for the lower-level earners - that’s a deadly serious question that needs to be answered before we start patting ourselves on the backs for our “growth.”

As I said, this is a fake bull market economy - absolutely fake. It’s fake growth and fake prosperity. Most people in this country are just too dumb to realize that their jobs are temporary and that the only ones really benefiting are the plutocrats.

Note the strategic use of “on” and “as” instead of “because of”. It’s such a headline cliche do avoid outright saying that any particular news event is definitely the cause of a stock market rise/fall.

And, of course, although it’s certainly true that the worsening news about the coronavirus caused today’s drop, the headlines are always focused on the single day’s move, and framed as though it’s a straightforward causal connection that any fule could have foreseen in both timing and magnitude, as though the market is simply a totally rational processor of facts.