Over the past week, stock markets around the world plunged as distressing news about the spread of the novel coronavirus continued to accumulate. In the United States, the three major stock indexes—the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500—fell more than 10 percent below their recent peaks, a sharp decline that qualifies in Wall Street terminology as a market “correction.” One investor quoted in The Wall Street Journal called it a “bloodbath.”
The global stock market is, theoretically, the distillation of how investors think everything that happens in the world will play out in the economy. Right now, judging by these drops, investors are much less optimistic than they were a week ago. But what they’re predicting is not only how bad the outbreak could be in terms of workers staying home sick, drops in consumer spending, or supply-chain disruptions; it’s also how bad people think it could be. Those might turn out to be two very different things.
Public perception of a crisis can be extremely consequential in financial markets. “The notion of a pandemic is pretty scary to people, and they’re going to hunker down and be careful about how they live their lives” if bleak news continues to roll in, says Richard Sylla, a former professor at NYU’s Stern School of Business. They may, for instance, start to skip vacations or dine out less. Airlines and restaurants, in turn, might lose revenue or even limit service because of what they think their customers will do. All of this combined would carry negative consequences for the economy, regardless of how catastrophic the direct impact of the disease actually turns out to be. “What people are thinking, even if it’s wrong, maybe matters more on a day-to-day basis [in the stock market] than what the truth is,” Sylla said.