Coronavirus crash: Economists try to make sense of dramatic stock market plunge

CTV National News: A financial meltdown The coronavirus is now a clear and present danger to the global economy as the Dow plunged almost 12,000 points. Richard Madan reports.

TORONTO — In the middle of a disastrous week for North American stock markets, U.S. President Donald Trump held a press conference Wednesday evening in hopes of minimizing fears about the novel coronavirus outbreak.

"This will end," Trump said of the outbreak. "You don't want to see panic because there's no reason to be panicked."

Trump’s words did little to calm investors. The Dow plunged 1,191 points on Thursday, marking the worst one-day point drop in the index’s history. In Canada, the TSX was down 325 points, or 1.9 per cent, when technical issues caused trading to come to a sudden halt.

The dramatic fallout means that North American markets are now on track for one of their worst weeks since the 2008 recession. The sell-out is largely driven by new fears that the COVID-19 outbreak could become a pandemic capable of causing widespread quarantines and shutting down industries worldwide.

Already, this week’s numbers are alarming, says Marvin Ryder, a professor at McMaster University’s DeGroote School of Business.

“This week so far, the Dow has closed more than 10 per cent down. Technically speaking, that’s called a correction,” Ryder told CTV News Channel on Thursday.

“If it goes another 10-per-cent down -- 20 per cent in total - now we’re into what’s called a bear market. And this is all being driven, not by prime economic news, if you will, but the fear of the coronavirus.”

The virus was first identified in China in January but has since spread to more than 81,000 cases internationally and nearly 3,000 deaths.

Ryder said recent outbreaks in South Korea, Iran and Italy have only added to worries that another global recession could be around the corner.

“Typically, the period between recessions is about 10 years. You do the math,” he said.

“So the market has been looking, looking, desperately looking for symbols that maybe a recession is around the corner, and coronavirus is giving them all the fears they need to start running like lemmings over that hill.”

PAST HEALTH CRISES

If history is any indication, the markets are highly reactive to international health crises.

U.S.-based investment bank JP Morgan analyzed the global market’s reaction to several different outbreaks, including SARS, swine flu, Ebola and the Zika virus.

According to those numbers, a sudden market decline was followed by a relatively speedy recovery within the next one to three months.

But Moshe Lander, an economics professor at Concordia University, cautioned against such comparisons. Lander pointed out that, in the case of SARS, the virus was predominantly spread from patients showing clear symptoms. COVID-19 may spread more stealthily because many infected patients are asymptomatic.

Economically speaking, China was much different in 2003, Lander added.

“It wasn’t the same because the role of China within the world economy was much, much less and the way that the disease worked … it was a slightly different disease as well,” Lander said.

WILL THE DOWNTURN LAST?

Lisa Kramer, a finance professor from the University of Toronto, said the recent drop is relatively large compared to past health emergencies. The difference this time, she suggests, could be that quarantines in China have disrupted some supply chains, and flight cancellations have had widespread repercussions.

“All of these factors are starting to show up in reduced corporate earnings, which puts pressure on stock prices,” Kramer told CTVNews.ca.

“Nevertheless, the magnitude of the downturn in markets appears to be out of measure relative to what we know about the longer-term economic risks. By this I mean that a 10-per-cent downturn suggests investors believe future corporate earnings are worth 10-per-cent less today than they were a week ago, and that point of view is very hard to defend.”

However, this week’s market downturn may not last long, Kramer said.

“I would note that rapid market downturns are often followed by rapid reversals. The original market reaction to dramatic negative news is often too extreme, driven by investor over-reaction,” she said.

Part of the problem could also be uncertainty, Kramer said, as public health officials are still trying to pin down certain details of the virus’s spread.

How the markets will respond to Thursday’s dismal results is anything but certain. But Ryder expressed lukewarm optimism about how Friday will unfold.

“So tomorrow, will we have another day like today? I don’t think so. Wednesday we were able to have a pause -- yes, the market went down 100 points, but it didn’t go down 1,000 points. I think we’ll have a little pause,” he said.

With files from The Associated Press