almost 4 years ago • 3 mins
The spread of the coronavirus throughout Europe and into the US this week appeared to spark a record sell-off of risky stocks in favor of safer government bonds and gold.
Over the last six weeks or so, people and companies across China have limited their activities – whether shopping or manufacturing – in a bid to contain the spread of COVID-19. The consequences of that alone have been far-reaching: public hotspots like Starbucks, McDonald’s, and Disneyland all closed their doors, while carmakers (like Honda and Groupe PSA) through computer-makers (like Apple and Microsoft) have all been hit by disruptions to their production. The natural consequence of this, of course, is lower company earnings and economic growth.
Given that China is the world’s second-largest economy, investors have taken note of the ramifications its slowdown will have on the global economy. But what they perhaps hadn’t fully reckoned with were the risks of the virus spreading west. With cases now being reported in the US – the world’s largest economy – and the European Union – which, collectively, is also bigger than China – both regions are likely to see similar disruptions, spelling yet more gloom for the global economy. And what’s perhaps worse is that analysts lowering their growth forecasts for the year don’t yet know the width, breadth, and duration of the potential pandemic.
Needless to say, volatility has been on the rise. Investors have been selling off stocks in every market pretty indiscriminately this week, in an effort both to avoid the worst of the fallout and to make room in their portfolios for the relative safety of gold and government bonds. In fact, demand for US 10-year government bonds is so high that, on Thursday, their yields fell to record lows as prices – which move inversely – rose to record highs.
In a downturn – or when investors are afraid of one, like now – so-called defensive companies like Nestlé, Danone, and Diageo tend to become relatively safe havens for investors who don’t ditch stocks altogether. They’ll be hurt by lower consumer spending, sure, but people will still tend to buy food and liquor no matter what. The hope, then, is that those companies will fare better than their “cyclical” counterparts, whose products are among the first to lose out when spending contracts.
Some stock market investors have tried to find a silver lining: they bought up companies that make medical devices like face masks – which should benefit from a surge in demand – and biotech firms that have reportedly made progress on potential vaccines. Likewise, some investors have been betting on companies that might benefit from people staying indoors, from Zoom Video Communications (which enables remote workers to video chat) to Netflix (which helps people… chill?).
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