Amid fears over the swiftly spreading coronavirus, the U.S. stock market lost an estimated $1.737 trillion of its value in a two-day period this week, leading some to wonder as the virus spreads around the world if a global recession could be close behind.
Investors are selling off riskier stock as a slowdown in economic growth due to a stricken workforce and a disruption in supply chains could become a reality.
The COVID-19 virus, which has infected more than 85,000 and killed upward of 2,800, has led companies such as Apple and Mastercard to warn shareholders that their bottom lines will take a hit.
“This outbreak will have a significant effect on worldwide demand for tourism, travel, and other services, while the supply chain disruptions and increased uncertainty will hurt current production as well as investment,” Eswar Prasad, a Cornell University economist, told Fortune. “The timing of the outbreak is especially unfortunate … Europe and Japan are flirting with recession while China and India had been losing growth momentum.’
On Wednesday, the slide continued with the Dow Jones industrial average falling 124 points to close at 26,957.59. The market is poised to open Thursday with stocks still on the decline.
As markets in the United States and around the world take a downward turn, more economists are talking about the possibility of a global recession.
The investment bank Goldman Sachs warned Thursday that U.S. companies could record zero earnings growth for 2020 if the virus continues to spread.
Why does a virus that has hit China hard move the world closer to recession? Because of China’s place in the global economy.
China accounts for 16% of the global economy and is the place where everything from cellphones to shoes are manufactured.
The region of China that has been hardest hit by the virus is a hub of global supply chains. According to Dun & Bradstreet, 163 of the Fortune 1000 have tier 1 suppliers in the region, meaning that those companies do direct business with manufacturers in that region of China. Ninety-three percent of the Fortune 1000 companies have tier 2 suppliers there, meaning they supply products to tier 1 companies.
Others are not yet forecasting a downward turn. The National Retail Federation issued a statement Wednesday saying it still projects sales growth of 3.5% to 4.1% in 2020.
"With gains in household income and wealth, lower interest rates and strong consumer confidence, we expect another healthy year ahead," NRF CEO Matthew Shay said in the statement.
What does that mean to the average consumer in the U.S. with stock accounts or 401(k)s? While a big hit to a stock portfolio is painful, the pain likely will not last long.
According to a story from CNBC, past outbreaks of deadly viruses that dragged down stock prices worldwide caused relatively short-term losses. In fact, on average, stocks that have taken hits due to virus outbreaks have rebounded within six months.
“On a forward-looking basis, dengue fever, swine flu, Ebola, measles, rubella, Zika, they don’t hurt the stock market that much,” said Dan Egan, managing director of behavioral finance and investing at Betterment.
Some economists believe that if there is a global recession because of a coronavirus pandemic the United States may be in a better position to weather the storm as the American economy is the strongest it’s been in years. American consumer spending may be what keeps the United States above the economic downturn, they say.
"The American consumer is the firewall between an economy that's growing and one that's not," Mark Zandi, chief economist at Moody's Analytics, told CNN Business. "If the American consumer loses faith, and the coronavirus will be a real test of faith, then a recession is going to happen."
What should Americans with 401(k)s do to protect their nest eggs? Probably nothing now.
Daniel Milan, managing partner at Southfield, Michigan-based Cornerstone Financial Services, told USA Today that he has cautioned his clients to not let fear drive their investment decisions.
“When dealing with a virus like this, it’s important for investors to review and recalibrate their long-term goals,” Milan says. “If fear is driving you to make emotional decisions in the stock market, then that’s a sign that you weren’t allocated appropriately for the long term,” he says, referring to how investors chose to split their portfolio among stocks, bonds and other assets.