Written by Mark Witte, Ph.D., Associate Professor of Economics at the College of Charleston School of Business
Plenty of ink has been spilled about COVID-19 — known more commonly as the coronavirus. Quarantines have disrupted supply chains and made it impossible for many individuals to work. Satellite data from China shows that the world’s second-largest economy is at a standstill. It also appears that quarantines won’t be entirely effective and community transmission may be inevitable.
And while this all sounds terrible, it highlights how important international supply chains are to the global economy. Complex manufactured goods have many components that are produced in countries around the world. These parts are then shipped to the manufacturer, where they are combined to make a final product. In the last 40 years, many companies have adopted a “just-in-time” manufacturing model. For example, our neighbors at Boeing don’t keep every part and piece they may need in a warehouse. Instead, Boeing (and many other corporations) rely on the delivery of these components at the exact time they are needed. The reliance on “just-in-time’ manufacturing and the global outsourcing of parts has kept costs down and slowed prices from inflating.
The problem with the hyper-efficient manufacturing of 2020 is that it’s very easy to disrupt. Costs are low, but there aren’t many alternatives. If you can’t get components from your primary supplier in China, then what other company can supply your firm? Perhaps another international company that also can’t get their product to you? The end result is that many firms can’t operate in a world of occasional lockdown and quarantine.
There’s no doubt that this disease will take its toll on our species and will burden our country’s medical system in ways that we’ve not seen in modern times. The good news is that it will not destroy any factories. No schools will be bulldozed. No buildings will collapse as a result of the virus. Yes, people and businesses will need to draw down on their savings while they’re not earning income. Not many companies will be rushing out to the bank to borrow money for expansion — instead, they’ll be raising cash just to survive. But, enterprise will still be there once immunity builds and/or the best medical researchers have worked their magic. In a few years, this disease may be just one of many illnesses that get lumped into what we call a “cold” or the “flu.”
Markets, by definition, are impersonal. They don’t care how or what you’re feeling. As economist John Maynard Keynes suggested, markets are motivated by “animal spirits.”
The two major influences of the stock market are greed and fear. At the moment, fear is winning.
The market also hates informational vacuums. The opposite of good news isn’t bad news; it’s uncertainty. And COVID-19 is a very uncertain disease. In its decline, the market is working as it always has. The financial system is not broken. The market is attempting to find the true value of the world’s publicly traded companies while simultaneously not knowing how this virus will impact those firms or even society as a whole.
If we permit markets to do their job, eventually greed will overcome fear. Is Disney really worth 30% less than last year? Did the Star Wars license, Avengers license and Mickey Mouse become less valuable? How about Exxon Mobil? Is it really worth 50% less than last year? Will COVID-19 cause the world’s economy to stop using fossil fuels? Will Aramco (Saudi Arabia’s oil company) really keep selling oil for $20 per barrel? Probably not. Eventually, greed comes back. Case and point: Greed caused the markets to rebound in March 2009 long before the economy was functioning normally and the banks had returned to health.
Every day, we learn more about COVID-19. Every day, uncertainty turns to certainty. The financial system is working normally. The industries and output that power the economy are not being destroyed; they’re simply being quarantined.
The Charleston Metro Chamber and College of Charleston want to help your business navigate through this difficult time. Profs on Call allows School of Business faculty to be available to help provide guidance and insight based on their area of expertise to businesses in need. Learn more at www.charlestonchamber.org/profsoncall