Forget that the major US stock indices eked out a small gain last week.
As an example, imagine that you are the CEO of a company that, for precautionary reasons, has imposed a travel ban on employees: What would you need to make you comfortable enough – internally, externally and from a legal liability viewpoint – to lift the ban?Even when analytical risks are objectively low, fear has a way of amplifying the negative economic and social effects of the uncertainties that comes with a new illness.
The most critical area is, of course, medical advances to better understand this new virus, contain its spread, counter its effects, and increase immunity. Markets will tend to grasp bits of positive news, whether confirmed or not, to counter the stream of negative economic news. The reaction will be particularly pronounced if the news is related to vaccine development.
Fifth, the more central banks are seen as less effective, the greater the risks to the impressive rally that has powered stocks to one new record after the other. The likelihood of more negative news will attract short-sellers looking for the type of sharp price drops that turn nervous holders of stocks into panicked sellers at a time when market liquidity can only accommodate a small amount of selling. But when market sentiment periodically shifts, as inevitably it will, the upward price pressure will be turbo-charged by short-sellers scrambling to cover their positions, bottom fishers and agile day traders – again in challenged liquidity conditions.