9 REMARKS Bloomberg Businessweek March 2, 2020ILLUSTRATION BY 731
Investors love a good metaphor to explain away what often
appear to be unexplainable events in financial markets. So you
hear about stocks taking the stairs up and the elevator down to
describe how a slow march higher in prices can be followed by
a sudden drop. Or “dead-cat bounce” will be offered as a dark
explanation for a market that makes a small but ultimately
futile rebound after a sharp loss, likening the price chart to
the way a cat seems to spring off the ground following a fall
from a tree—even though it was killed on impact.
In recent years the metaphor trotted out over and over
has been that stocks are “climbing a wall of worry” as
investors dismiss threat after threat, be it the European
debt crisis, the trade war, or escalating tensions between
the U.S. and Iran. Central banks such as the Federal Reserve,
entrusted with the power to set interest rates and buy assets,
are viewed as the Sherpas who help investors make this
climb. The problem at the moment is how to view the poten-
tial damage from the novel coronavirus now that the illness
is spreading to countries beyond China. Is this just another
row of bricks in the wall of worry, just waiting to be scaled by
intrepid financial rock climbers? Or are we confronted with
an unforeseen layer of razor wire that’s insurmountable,
even with the help of the strongest Sherpas?
As silly as they sound, these metaphors shape the nar-
ratives that influence markets and economics—a phenom-
enon catching a lot of interest because of Yale economist
Robert Shiller’s latest book, Narrative Economics: How Stories
Go Viral & Drive Major Economic Events. “Going viral” is yet
another metaphor, but in this case it’s pretty spot on: Shiller
shows how narratives often spread, and then dissipate, at
similar rates of speed as epidemics—and how their impor-
tance is grossly underestimated in economics and finance.
Equity markets were jolted out of a sense of complacency
as the original narrative surrounding the coronavirus—that
it was largely contained to China and would be only a brief
headwind to the global economy—went up in smoke. With
the Tokyo Marathon canceled and outbreaks reported in
such places as Milan, the French Alps, and Spain’s Canary
Islands, the random spread of the sickness from Wuhan’s
open-air market to the holiday destinations of the global
affluent has clearly alarmed the investor class. Meanwhile,
the human toll on countries with weaker health-care infra-
structure, such as Iran and Afghanistan, could prove to be
even more devastating.
The uncertainty surrounding the virus is creating an
information vacuum for investors, as many global compa-
nies such as Apple, Nike, and United Airlines warn that their
previous financial forecasts won’t be met but they can’t yet
offer a replacement. This adds a layer of fog on top of a data-
set of health and economic statistics out of China that many
investors view as untrustworthy. Reliable statistics are tak-
ing on greater significance, such as an IHS Markit survey of
purchasing managers signaling that the U.S.’s dominant ser-
vices industries had already begun to shrink in February
because of the effects of the virus.Whatever new narrative investors latch onto will be(^) influential, given the shortage of more reliable data points.
Donald Trump, a master when it comes to the self-
flattering narrative, has one he’d like to push. He’s staked his
reelection campaign on taking credit for a strong economy
and an elevated stock market—both of which were at risk
even before the virus began to spread in the U.S. With the
Dow Jones Industrial Average down more than 1,000 points
on Feb. 24, Trump took to Twitter to push his chosen nar-
rative: “The Coronavirus is very much under control in the
USA,” he wrote. “We are in contact with everyone and all
relevant countries. CDC & World Health have been work-
ing hard and very smart. Stock Market starting to look very
good to me!”
Unlike his tweets about the trade war, however, this
attempt to shift the narrative failed to lift investors’ spir-
its. The next day the U.S. Centers for Disease Control and
Prevention warned that Americans should brace for the like-
lihood that the virus will spread in the U.S., and the sec-
retary of health and human services, Alex Azar II, told a
Senate committee, “This is an unprecedented, potentially
severe health challenge globally.” The Dow fell more than
3% for a second day.
Meanwhile, investors and analysts, starved of hard
data and conclusive estimates for the ultimate human and
economic toll of the virus, are wondering if years of scaling
the metaphorical wall of worry have left markets compla-
cent to what ultimately could be the most serious risk to the
global economy since the financial crisis. They’re passing
around stories quoting experts such as Harvard epidemiol-
ogy professor Marc Lipsitch, who says the likely outcome is
that the virus won’t be contained and somewhere from 40%
to 70% of the world’s population could be infected within
the year.
What, then, can be expected of the market’s old friend
and wall-of-worry Sherpa, the Federal Reserve? The minutes
of the latest Fed policy meeting and remarks from various
policymakers signal they’re taking the threat of the virus
seriously; futures traders are pricing in the probability of
two to three 0.25-percentage-point rate cuts before the end
of the year. Still, this has done nothing to stop the bleeding
in the stock market, with the S&P 500 down 8% on Feb.
from a record just seven days earlier. After all, what can cen-
tral bankers realistically do to stem simultaneous supply and
demand shocks as factories close, cross-border trade dwin-
dles, and consumers find themselves in either voluntary or
involuntary quarantines?
Regardless of which path the narrative travels in coming
weeks, it’s clear the reflexive instinct among investors over
the past decade to buy stocks aggressively following periods
of market weakness—to keep climbing that wall of worry—is
being called into question in a big way.
There’s an old Wall Street metaphor that comes to mind
to describe the inherent risk that such a strategy poses at
the moment: trying to catch a falling knife.