In response to outbreaks of the novel coronavirus known as COVID-19, global stock markets have become increasingly volatile, with a nearly 2,000 point drop in the Dow Jones Industrial Average on Monday representing the biggest dip since the 2008 financial crisis. But economists said the future of the economy remains uncertain until more is known about the severity of the global outbreak.
When stock exchanges opened on Monday, indexes fell so sharply they triggered a “circuit breaker” or a temporary pause in trading intended to slow massive plunges in stock prices and give investors an opportunity to reassess the market before trading resumes.
“When you pass a particular limit, then the trading stops so then everybody can take a breather and figure out what is going on,” Cristian Tiu, a finance professor at the University of Buffalo told The Globe Post. “Is it just that the fundamentals are so horrible … or is it just that we sold and didn’t actually think too much about it?”
There are three thresholds that can trigger circuit breakers including a seven percent drop in the S&P 500, which triggered the 15-minute circuit breaker on Monday. If the S&P drops 13 percent, trading will halt for an additional 15 minutes if the drop occurs before 3:45pm EST. The final circuit breaker, which halts trading for the remainder of the day, occurs after a 20 percent drop.
Despite Monday’s stock market plunge, Tuesday saw a rebound as President Trump pitched some economic stimulus proposals including a temporary payroll tax cut and targeted infrastructure spending to Senate Republicans with the hope of mitigating economic fallout caused by coronavirus.
But as of Wednesday morning, stocks again were trending down.
The heightened volatility of the stock market in recent weeks highlights the great degree of economic uncertainty associated with the COVID-19 outbreak. American University Economist Ignacio Gonzalez Garcia told The Globe Post that while that uncertainty has taken a toll on the financial sector, it should not itself hugely impact the economy as most financial wealth is in the hands of wealthy people.
Instead, Gonzalez said what really matters is the outbreaks’ impact on the “real economy.” While the stock market may be reflecting the effect of coronavirus on the real economy, the uncertainty surrounding the severity of the outbreak makes it hard to know just yet.
“If the uncertainty is resolved and the worst expectations about the spread of the virus are confirmed, then we will see a deep supply shock to the economy and firms will have to cut production,” Garcia said. “This would affect wages and profits, and we would see a decline in the aggregate demand, which would depress production even further.”
According to Gonzalez, the government response to the virus is crucial to blunting the impact of the virus on the real economy. So far, the government response in the U.S. has been slow, with the number of test kits substantially behind goals the White House set last week and a large population of Americans without health insurance further complicating matters. As of this writing, there are currently more than 800 confirmed cases of the virus in the U.S. and a total of 28 people have died so far.
To prevent the spread of COVID-19, wash your hands regularly, cover your mouth and nose when sneezing or coughing, avoid touching your face, and avoid contact with individuals exhibiting symptoms of respiratory illness. Although symptoms of the virus are mild for most infected individuals, people 60 years or older are especially vulnerable and the Center for Disease Control recommends taking special precautions for these individuals.
For more information about the coronavirus and what you can do to prevent infection, visit the World Health Organization and CDC websites.
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