What the markets imply about the economic impact of the coronavirus

THE START of the year has been a rollercoaster for stockmarket investors. Out of the gates in January they experienced a gradual ratchet higher, climbing to an all-time peak in America, before a brutal and swift 11.5% plunge in the S&P 500 during the last week of February. So far in March investors have loop-the-looped. After the Federal Reserve convened an emergency meeting on March 3rd to cut interest rates by 0.5 percentage points, stocks spun and gyrated and the yield on the ten-year Treasury bond fell below 1% for the first time ever (see chart).

Uncertainty and fear about the spread of the covid-19 disease are to blame for the havoc (credit for some of the gains on March 4th may belong to Joe Biden, a moderate Democrat, who won the most delegates in primary voting on “Super Tuesday”). The market is wrestling with three fears. First, that the virus will (and may already have) spread widely across America and the rest of the world. Second, that fear of covid-19 and measures to stem its spread, like advising workers to stay home, will have severe consequences for economic activity. And third, that policymakers may be unable to keep short-term disruption from becoming long-term damage.