The stock market has been very volatile this past week. The Dow Jones Industrial Average dropped 10% on Thursday (3/12/2020) due to fears of coronavirus. This was the largest one day drop in US stock market since Black Monday of 1987. I suspect that the reason we see these spikes in the stock market is due to liquidity drying up. This was evident when the stock market was dropping, and at the same time, the 30 year treasury yields were going up. Traditionally, during times of distress, investors would sell stocks and buy bonds, which drives the bond prices up and bond yields down. However, this past week, we saw that investors were selling both stocks and bonds. It appeared as if there were no buyers and the market just ran out of cash. The Federal Reserve noticed this and announced that it would inject more than $1 trillion into the Repo market if necessary. As coronavirus spreads across the United States, there is going to be more panic in the stock market. Travel, hospitality, and oil are the three sectors that have been hit the hardest due to this outbreak. In this week’s blog post, I’ll talk about the possibility of a global recession. A global recession is an extended period of economic decline around the world.
Why would there be an economic decline? Well, let’s say you are living in the United States, a country getting ready for the coronavirus outbreak. As a consumer, who is advised to stay at home, you are less likely to go to that coffee shop or restaurant. This definitely hurts the bottom line of food and beverage industry.
While you stay at home, you are not traveling. You are neither filling gas in your car nor making any travel plans. You are not booking flights, hotels, rental cars, etc. In fact, you are canceling your travel plans, and travel companies are having a hard time coming up with cash to refund you. Undoubtedly, this is detrimental to energy, hospitality, and travel sectors.
As you stay at home, you are not spending money. You are not going to that shopping mall or movie theater or getting your hair done. In fact, if you are an hourly worker, you might not be making money while you stay at home. Moreover, as the business slows for sectors such as food, oil and gas, hospitality, travel, retail, etc, the hourly workers in those industries will get their hours cut. As workers make less money, the spending diminishes. As spending slows down, the economy slows down. It’s a vicious cycle which takes down every possible sector across the globe. For example, if you fear unemployment, you will not go out and buy a new car. Car manufactures would notice the drop in sales. Consequently, car manufactures would slash their orders to other companies in their supply chain – metals, chemicals, semi-conductors, technology, etc.
The US economy is the largest economy in the world, and if the US economy slows down, all other countries will feel the slowdown as well. For instance, the US consumer is not going to buy that “Made in India” rug, or that “Make in China” electronic item, or that “Make in Bangladesh” t-shirt, or that Swiss watch. It’s a ripple effect. A slowdown in the US economy will inevitably disrupt every other economy in the world.
Now, like I stated before, the Federal Reserve is willing to inject more than $1 trillion of liquidity in the Repo market if needed. A Repo market is simply a place where you (as a company) go to when you are in dire need of cash, and you can provide high quality collateral to an institution in return for cash. This Federal Reserve intervention does not fix the supply chain problem or curtail the spread of coronavirus. All this intervention does is provide liquidity in the credit market. In other words, the Federal Reserve can not force a company to borrow cash and continue the business operations, when that business is seeing a drop in sales and reporting losses. The Federal Reserve can not prevent a recession from happening. If individuals are under “lock down” and aren’t willing to spend money, a slowdown is unavoidable. Lastly, even the coronavirus relief bill passed by the lawmakers cannot resolve the global supply and demand shock. A global recession could very well be around the corner.
Hope you learned a little and found this blog post helpful. We talked about how all sectors and countries are interconnected, and the possibility of a global recession. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.