I don’t know the difference between the common cold and the coronavirus. A lot of chicken soup seems to do the trick for my common cold. From a market perspective, the question is whether the coronavirus is a geopolitical or an economic event. Geopolitical events, such as U.S.-Iran tensions or the U.S-China trade war, generally have one thing in common: the effect is limited to a certain geographic area and tends to have a brief impact on the market. By contrast, an economic event may have extended impacts across the globe. “Black Swan,” a book written by Nassim Taleb in 2007, focuses on the impact of such rare and unpredictable outlier events. At this time, we do not know if the coronavirus will be a Black Swan.
What we know for certain is that Wuhan and the wider Hubei province is a manufacturing hub for the world economy. It is an integral part of the supply chain, not just for U.S. auto and technology companies, but for the world. It has been shut down for weeks and is having trouble reopening. It has been reported that 60 million people are quarantined, travel is restricted, many airlines have stopped all passenger traffic and shipping has been severely curtailed. This is the supply side impact, and there is a demand side impact as well. Nonetheless, the global markets have surged, shrugging this off as just another geopolitical event. Let’s hope the market is right.
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