March 2020 – Amid Drew University’s decision to move instruction and business operations online for the remainder of the semester, we’ve reached out to some of our faculty experts to put the novel coronavirus (COVID-19) pandemic into perspective.
Below, Marc Tomljanovich, executive director of business programs and professor of economics & business, offers his expertise on the economy and financial markets during this time.
Why does a health pandemic cause the stock market to immediately plummet? Is it simply panic?
Markets hate uncertainty and risk, and we have it here in spades. There are emotions hitting all investors right now, but I don’t think it’s necessarily panic. Rather, it’s a question about how this barrage of bad news will affect a company’s future profits. For each organization, how are your sales affected? Will people be buying new cars now? Consuming Starbucks lattes? Ordering food from Grubhub? Getting haircuts or dry cleaning? Strolling through malls? Ordering stuff from Amazon? In many cases, we just don’t know. Well, unless you are a cruise lines company—then it’s pretty obvious.
There’s a ton of uncertainty about the labor markets—even if your company sells a necessary set of products or goods that may weather this social distancing well, will lots of people lose their jobs and have to cut back on all consumption anyway?
We’ve seen historic drops and slight recoveries seemingly several times in the stock market these last weeks. Why the up and down?
There is a ton of uncertainty and we see it playing out in the stock market. Every single new piece of information that hits is given heightened importance by investors, and absorbed in real-time by the markets. This causes the price swings from day to day, or even hour to hour.
What do you think will happen in the next week? Month? Year?
I think the sharp drop in cases of COVID-19 in China and South Korea is a very promising sign, and gives us a timetable for recovery if we adopt the same stringent controls on interactions that those governments did. From the start of the mass outbreak in those countries to their current situations took about two months.
Looking at past outbreaks (SARS, MIRS, etc.), economies and markets tend to bounce back fairly quickly once the outbreaks are finally contained. So, I remain pretty positive about the long-term impacts, even though right now it’s pretty dismal for all of us.
How does what’s happening in other countries affect the U.S. economy?
The biggest direct effect will be on U.S. exports. Not only the goods that we send to other countries, but our services too. Think tourism—European and Asian families aren’t going to come to the U.S. to enjoy vacations until at least mid-summer, and possibly not until much later than that.
This pandemic reminds us all that the world is truly connected. The free flow of information and ideas has the potential to help everyone by showing U.S. policymakers, for example, what methods have worked well to slow the disease’s spread. It reminds people in every town, state and country that we are not alone in confronting this crisis.
U.S. and global economic growth will recover once this turmoil settles down. Let’s all hang in there, be patient with respect to our long-term investments, and remember what’s really important: our family, our friends, and our health.
What can the government do to stimulate the economy and avoid a recession?
We’re already seeing some policy actions. On the fiscal side, Congress is working on a $1 trillion stimulus package, which is comparable in size to the bills passed following the 2008 financial crisis. On the monetary side, the Federal Reserve has slashed its main policy rate twice this month, including to zero on Sunday. It has also announced it will buy $700 billion in long-term bonds, and created a new lending facility to keep short-term credit facilities operating smoothly. All of these moves are designed to jump-start the economy, but they will really only start to take effect once we can all start interacting again.
That being said, a recession is pretty inevitable at this point. Household consumption, which comprises 70 percent of U.S. economic output, is going to get hammered in the first and second quarters of 2020. The big question is, how long will societal restrictions and quarantines last? One forecast I’ve seen has the U.S. economy returning to growth in the second half of this year, under optimistic projections.
What would your message to the average American be in terms of finances, outlook, etc.?
To wait. Look at the 2008 financial crisis. The Dow Jones Industrial Average tumbled from 12,000 in September 2008 to under 7,000 by March 2009. Then we turned a corner and markets shot up on an incredible bull run to 29,000 by early this fall. While that is clearly over for the near future, the fact is that stock markets trend up over time.
U.S. and global economic growth will recover once this turmoil settles down. Let’s all hang in there, be patient with respect to our long-term investments, and remember what’s really important: our family, our friends, and our health. Stay safe, everyone.
For the latest information regarding Drew’s response to the coronavirus, visit the Coronavirus Disease 2019 (COVID-19) resource site.