Coronavirus crisis is exacerbating long-standing stock market vulnerabilities – bad news is no longer good news

Markets read the US Federal Reserve’s emergency rate cut as a sign of panic, resulting in last week’s correction, but stocks are still overvalued

Global growth fears have chipped away at market confidence, indicated in the drop in the US 10-year Treasury yield. Markets are now pricing in a recession

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Traders work on the floor of the New York Stock Exchange on February 24. Last week, global stocks lost 13 per cent, wiping US$6 trillion off the value of equities. Photo: AFP

Published: 4:00pm, 5 Mar 2020Updated: 10:27pm, 5 Mar 2020

The “bad news is good news” mantra in financial markets is not as convincing as it used to be. Last week, global stocks lost a whopping 13 per cent, wiping US$6 trillion off the value of equities, the worst week for stock market wealth destruction ever recorded, according to data from the Financial Times.

Fears over the economic impact of Covid-19 rattled markets as investors took fright at the sudden outbreak of the disease in Italy.

Yet, on Monday, sentiment improved sharply, with the benchmark S&P 500 index enjoying its biggest daily advance in 14 months. Signals from global policymakers that stimulus measures to address the economic fallout from the epidemic would be forthcoming helped stabilise markets.

However, no sooner did the US Federal Reserve cut its main interest rate by half a percentage point than stocks resumed their decline. Over the past several years, bleak economic indicators have often been treated by investors as a buy signal on the grounds that they increased the scope for further stimulus, buoying asset prices. Yet, it took the coronavirus outbreak to reveal the true limits of monetary policy.

As I have argued previously, lower borrowing costs are of little use in dealing with supply disruptions caused by a public health emergency. Central banks cannot cure infections.

Moreover, by delivering an emergency rate cut, the Fed “hit the panic button”, as ADM Investor Services, a UK brokerage, rightly observed in a note published on Tuesday. Markets have been given an additional reason to fret about the severity of the virus-induced hit to growth.