The Novelty of the Coronavirus: What it Means for Markets

This article originally appeared on the Enterprising Investor here.

Does market history offer any parallels to today’s novel coronavirus crisis?

Market action in recent weeks has been reminiscent of the global financial crisis (GFC) of 2007–2009, the crash of 1987, and, for those with a long memory, the crash of 1929, which wouldn’t have been so disastrous if it had not been followed by the crashes of 1930, 1931, and 1932.

What can we learn about the present from this history? What, if anything, does the current meltdown have in common with those of the past, and what’s different this time?

In the wake of the GFC, when the S&P 500 lost 57% from peak to trough, I compiled a CFA Institute Research Foundation monograph entitled Insights into the Global Financial Crisis. In addition to collecting the works of others, I wrote an introductory essay with the unwieldy title, derived from a quote from a famous physicist, “A Riskless Society Is ‘Unattainable and Infinitely Expensive.’” The basic theme was that societal attempts to eliminate risk through financial guarantees backfired and created more risk than ever before. This process was described elegantly by the late economist Hyman Minsky. In simpler terms, the GFC was the result of moral hazard.

Other articles in the compilation described the GFC as a giant margin call. The crisis originated in the financial sector and spread to other parts of the economy because finance is a form of infrastructure: It’s a service we take for granted. Until it stops working.

The current novel coronavirus crisis is completely different. It is the first instance in peacetime that we’ve observed of a simultaneous disruption in the supply chain and the demand chain. As the journalist and speechwriter Peggy Noonan said in the wake of the 11 September 2001 attacks, “Nothing like this has ever happened before and we have nothing to compare it to.” That does not mean it is worse than anything that happened before, just different. But the economic consequences, so far, have been terrible.