Why is the Coronavirus Affecting Financial Markets?

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Hi Taylor - I saw stocks take a big hit a week or two back and read that a lot of it was due to coronavirus fears. Do you know why an outbreak like this can affect the markets so much? - Charlene

Hey Charlene - That’s a really good question. You see a lot of headlines about markets dropping because of coronavirus worries and concerns, but those headlines don’t explain the connection. If you dig deeper, you can find a handful of reasons why a health epidemic like this can have both an immediate and lasting impact on the economy.

1. Travel and tourism. Right out the gate, as soon as the first news broadcast aired reporting an outbreak in China, there was a small but noticeable hit felt by all the businesses in the area. In addition to restaurants and hotels shutting down due to quarantine, travel plans to all parts of China started taking detours. With the country’s size and population, that kind of shakeup causes a massive ripple effect for airlines and hotels around the world. Even if the coronavirus hadn’t been as big of a deal as it clearly is, global travel still would have been hurting for at least a few days as people cautiously canceled plans and figured out what was happening.

2. Supply chains. Trade with China is a big deal for most countries, due to both the geographic size and population of the country. When a health issue like this comes into play, supply comes to a grinding halt as different trading partners wait to make sure they aren’t about to infect their own people. Depending on the product and demand, supply chains might change until the World Health Organization says things are under control. That could leave the U.S. paying more for a commodity or getting less of a certain product than we normally do. Everything from cars to coffee sales has taken a hit, and analysts are predicting an extreme slowdown in the growth of the Chinese economy over this first quarter.

3. Doubt. Since Wall Street investors are all about predictions, any event that leaves them questioning what happens next will likely spook the markets. We’ve already seen this play out several times this year with news about Iran, the impeachment, and election news. With something as rare as a global health crisis, no one knows exactly what’s going to happen. It could be over soon or it could force another economy to be quarantined and shut down, in which case the markets will see even more severe losses. In the meantime, the worrying will have investors treading a little more cautiously than normal.

Some turns in the market can be hard to pinpoint. With something like the coronavirus, you’ll see both a direct and indirect economic impact. For now, I’m praying for the health of those affected and a quick end to this outbreak.