The coronavirus gores Trump’s bull market

We all knew that the stock market boom would one day come to an end, but who imagined that the instrument of its demise would be a runaway global virus? The market had been setting new highs as late as February 12 and appeared little concerned with the coronavirus, whose effects seemed mainly confined to China. Since then, it’s been downhill. The Wilshire 5000 index has dropped 12%, reflecting a paper loss of $4.3 trillion.
The main cause of the decline is renewed uncertainty. Traders and investors don’t know — and can’t know — how the spread of the coronavirus will alter the real economy of production and profits. The virus has already emerged in other countries, most notably South Korea and Italy, and there is a smattering of cases in the United States. There will be more, warns the Centers for Disease Control.
Inevitably, all of this has raised questions about how the economy and presidential election will be affected. Broadly speaking, the possibilities are clear. Under an optimistic scenario, the virus-related fears will be seen to be exaggerated. Stock prices stabilise or even recover. The threat to President Trump’s re-election fades. Indeed, he is praised for not contributing to a rising hysteria.
The more pessimistic narrative assumes that the number of global virus cases continues to rise, creating a vicious cycle. Worried consumers and businesses cut their spending. Profits fall. This depresses stock prices more. In reaction, both individuals and firms postpone further purchases — everything from vacations to business investment. Trump is exasperated. His frustrations give way to hostile outbursts that are criticised for compounding confusion and fear.
What’s worth remembering is that, even before the coronavirus, the US economy was widely believed to be slowing down. In 2019, gross domestic product grew 2.3%. For 2020, Moody’s Analytics projects 1.7% growth, though its forecast does not include a recession.
“Despite a plethora of geopolitical risks threatening the global economy,” Moody’s says in its latest forecast, “there are reasons to be optimistic that the US economy could surprise on the upside. The biggest source of optimism is the US consumer” — who continues to spend strongly. Unemployment is low, and confidence has been high, at least until now.
But suppose that consumers, who represent about 70% of the economy, become more anxious and cautious. Instead of propping up the economy through strong purchases, they do the opposite: they spend less.
Similarly, many financial commentators have long considered stocks overpriced. One widely cited indicator of stock prices is the so-called P/E ratio, which compares stock prices (the “P”) with the underlying earnings or profits (the “E”). Since 1936, the P/E for the Standard & Poor’s 500 stocks has averaged about 17, according to Howard Silverblatt, a senior analyst at S&P Dow Jones Indices. At the end of 2019, the P/E was 23. If all of that reflected over-valuation, the gap implies that stocks are overpriced by about 35%.
There are two aspects to the crisis, distinct but also related. One is suppressing the virus outbreak. This is mainly a public-health problem. The most important thing the administration can do is to support the health care professionals in the United States and around the world who are charged with getting the coronavirus under control.
Political interference with that process will almost certainly backfire by corroding public confidence and abetting confusion. Some of Trump’s public comments have not been helpful, because they suggest that the president is not entirely in agreement with some of his medical advisers.
The second problem is related. It is to prevent a public health crisis from becoming simultaneously a financial crisis. There will doubtless be proposals for the Federal Reserve to cut interest rates. Just what this would accomplish is unclear. In 2019, the Fed cut rates three times. They now stand between 1.5% and 1.75%. Would cutting them another quarter of a percentage point?
No doubt the president is unhappy with the dramatic decline in the stock market. He has clearly indicated that he expected to make the market’s spectacular gains a major theme in his bid for reelection.
This will be harder now, maybe impossible. But if Trump responds by searching for scapegoats or blaming his economic and health advisers for not reassuring the public, he will make a bad situation worse — for him, the country and (possibly) the world.
In other words, Trump is still making the situation as risky for himself as possible — and risking real policy failure in responding to real danger to public health.

—The Washington Post

Robert Jacob Samuelson is a journalist for The Washington Post, where he has written about business and economic issues since 1977