March 30, 2020

Wall Street Is (Finally) Waking Up to the Damage Coronavirus Could Do

“The portfolio managers thought this would be temporary,” said Megan Greene, a senior fellow at Harvard Kennedy School. “They figured this is a flash-in-the-pan virus, that it will finish as soon as the winter does, and that even if that assumption isn’t right, that central bankers will step in and fix this mess.”

Markets accustomed to optimism may be all the more vulnerable if the virus becomes a global pandemic that causes meaningful pullback of commerce across major economies. Even after the sell-off this week, financial markets remain richly valued by historical standards.

The trade war, in which the United States and China placed tariffs on specific imported goods, caused a significant slump in manufacturing last year. But the coronavirus is hurting service industries as well. If the authorities in major world economies start shutting down any facility where large numbers of people congregate — a list that includes factories, shopping malls and airports — the damage could prove broad and lasting.

When a hotel or airplane sits empty for weeks because people are afraid to travel, that is a loss that cannot be recovered once business returns.

That’s particularly relevant for the United States, where service industries account for the majority of economic activity. This means that even companies that made it through the trade wars unscathed might be exposed to lost revenue or business shutdowns because of the virus outbreak.

Moreover, while tariffs might put sand in the gears of global commerce, that has different implications than gears that stop entirely. Companies had many options for dealing with the trade war, whether sourcing goods from elsewhere or simply paying more for them.

The longer the shutdowns of Chinese production, and the more widely other countries are forced to take similar measures, the more the spread of the virus could affect the ability of global companies to do business.

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