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Is this the end of the Trump economy? Spooked by coronavirus, markets show signs of correction
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Under the Trump administration, the U.S. economy rocketed into uncharted territory. The economy is enjoying the longest period of growth in history, with unemployment at historic lows. While opinion is divided on whether or not the economy will finally experience a recession in 2020, there have been no apparent triggers, until now. The impact of the coronavirus remains unknown, and with the germ spreading globally, markets are spooked.
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In economics a 'black swan' is an unpredictable event which has potentially severe consequences.
LOS ANGELES, CA (California Network) - As long as people are buying, the stock market will go up. The idea is if a person buys a share in a business, they will be able to sell that share later for a profit. That simple belief is the engine that drives the market. And the market matters because it is the hub for the entire U.S. economy. The U.S. economy matters, because it is the heart of the global economy.
But now, a contrary view is emerging. Investors are worried that buying activity will drop. This means their shares will be worth less, at least in the short term. Some investors are responding to the possibility by moving their money into assets which hold their value better at the cost of lower returns.
The problem spooking investors is the coronavirus outbreak spreading uncontrollably across China. Cases are appearing around the world, suggesting we are too late to contain the virus. Still, governments are scrambling to protect their people, screening travelers at airports and even banning travel and enforcing limited quarantines.
These kinds of activities restrict economic activity. China, which is the undisputed leader in global manufacturing, is locking down entire cities. As the infection spreads, the closure of factories and even ports and airports, is inevitable. This means production will drop and orders will be delayed. That will impact supplies of durable goods and other items in demand around the world. In economic terms, the "supply chain," the flow of goods, is being disrupted.
Weather, accidents, and other unforeseen circumstances do arise from time to time. These events are uncommon, but they happen. Economists call them "black swans," a reference to the occasional appearance of a black swan when all swans are supposed to have white plumage.
Generally, these disruptions can be weathered. A business can find another suppler, or consumers may turn to a substitute. This is called the "substitution effect." But when disruptions last for an extended period, they can take a serious toll. For example, a hardware store that imports appliances assembled in China will find itself unable to meet consumer demand. Business will slump and profits will drop, possibly turning into a loss. If the disruption goes on too long, the store will be forced to lay off employees and make other cuts to make up for lost income and stay in business.
This is the danger posed by the coronavirus. If the disease spreads and nations like China maintain extended quarantines, there will be disruptions to the global markets. And once investors begin selling their shares, it could trigger a panic with many others trying to sell before prices of their stocks fall too far. If a corporation is endangered by the economic black swan event, its stock could plummet overnight. Within days, a growing economy could fall.
The good news is central banks can usually prevent full-blown collapses. However, they have less power over recessions, which is a drop in economic activity. Recessions can be extremely disruptive with businesses closing and millions of people losing jobs.
The economy also impacts politics, and in times of economic crisis, people often turn to more extreme candidates for election. Incumbent politicians often find themselves voted out.
For the moment, the market has corrected a little, and is bouncing back as of today (1/28/20). But markets are notoriously difficult to predict. Not even the most talented investors can predict tomorrow's prices because nobody can predict the news. The market will remain sensitive to the coronavirus. If the spread of the disease begins to disrupt supply chains, we will see investors react, and that could spell the doom of the Trump economy.
All people should review their financial situation and think about plans, just in case.
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