FGCU Economist on Coronavirus Impact on Markets

Feb 26, 2020

Coronavirus fears have taken the stock markets on a wild ride after weekend news of more cases of the virus confirmed outside of China.  WGCU’s Julie Glenn talked with FGCU professor of finance Dr. Thomas Smythe about the health problem that has become a major economic issue. He says he knew there’d be market volatility before the week even started. Here is a transcript of that conversation:


Dr. Thomas Smythe:   Monday, given what we learned over the weekend about Iran and Italy, especially coming into Europe, that way, I sort of had a suspicion that we might see a little bit of a market shake up. And sure enough, the futures markets were down about 900 points, the market opened pretty much down immediately about 550. And quickly got got down to 900 and then closed down about a little over 1000, which is about three and a half percent. So this doesn't surprise you. Not, not dramatically. I think there were a number of things sort of in the mix, which is always the case with market events like this one is we were at an all time high. On some level, I believe.

Julie Glenn: People were looking for a reason to get skittish?

Dr. Thomas Smythe: Yeah.  We we'd been sort of bumping up against all time highs for really over about a year. It was the longest, one of the longest bull markets in history approaching 30,000 on the Dow, which is a sort of a mental barrier. I think the other recognition was that it wasn't just a China or Far East problem anymore. You know, with Iran and certainly Italy, what was going on in Italy, the quarantine of the northern region made it significant. So when we're talking about the market, we're talking about fears and nervousness and all of that as instead of concrete, actual, economic fallout, but there are concrete economic problems that are going to be occurring because of these quarantines and because of these concerns, yeah, absolutely. And we're already starting to see them last week, Apple announced that it was not going to meet its earnings targets for the first quarter of 2020 because a big chunk of their supply chain, a lot of their manufacturing is done in China. So, you know, if you don't have product to sell because they've shut down plants in China, then you're not going to get money. And I think with what happened over the weekend there, there is now a recognition that it's not just companies with heavy concentrations of supply chain in the Far East, but it could spill over into other markets. We're already seeing it in Italy.  They've essentially quarantined 11 or 12 towns in the northern region, and things aren't going in and things aren't coming out. Even though the number of cases it has the largest in the developed world, outside of South Korea, with I think I saw 300 cases that have been confirmed. It's still sort of that that beachhead in the world. You know, it's one thing when it's in China, and we all have questions about, at least I think a lot of people have questions about is it really contained? They're not, you know, how much information are we getting? That's very good. But you know, again, when you get into, say South Korea, which is a democracy, and they put 7000 soldiers under quarantine, they've had obviously a number of cases and deaths there and then Italy's getting a lot closer. It's a classic fear factor.

What's interesting about this situation, and I've gotten a number of questions about this over the last couple of days is well, this is a health problem, you know, why is it affecting the market and one is just emotional fear that the emotional side of it, but the fact that we have diversified our supply chain with which you and I've talked about before, and the fact that pretty much any product that you get electronics, cars, you know, whatever, whatever the complex product is, there's a high probability that at least some of the components of that come from somewhere other than the United States. And a lot of them come from the Far East.

Julie Glenn: Oh, yeah. It’s hard to find anything not made in China.

Dr. Thomas Smythe: That's right. So the reality is it then it becomes a business or economic fear, right? The fact that the supply chain is seizing up, plants are shut down, ports are closed. Those kinds of things, it now becomes

Julie Glenn: An economic issue.

Dr. Thomas Smythe: Exactly. Yeah, that's exactly right.