First, as I have long argued, markets have realised that stocks were horribly over-valued, come what may. That bubble has burst. The disconnect between real markets that were going nowhere and stock markets marching inexorably upwards has been broken. That needed to happen. The timing and the speed have both been brutal, but it was overdue. QE and the thinking of the pension sector – in turn driven by inappropriate regulation and the economic myth that it is actually possible for whole generations to save for their retirement when that is not true, because only real investment activity can achieve that goal, and savings and investments in this sense are almost entirely unrelated – have led to vast amounts of money seeking a home in the stock market, which has at the same time restricted the supply of available shares to buy. The result was a bubble, pure hype, and now a crash to which we have not as yet seen the end.
But, second, coronavirus is already going to hurt. Trade events and shows are not happening. Sporting events likewise. People are already losing money. In my own hobby, a big show scheduled for April is incredibly unlikely to happen. That’s a massive deal for the traders who were going to be there. It’s maybe an even bigger deal for the venue, the caterers and all their staff. The real losses are already happening. And whatever happens this will get worse as attempts to avoid risk grow amongst people at large. Of course, that isolation might just work for coronavirus. But the traders may not recover. And their employees are already in trouble.
New information arrives concerning the economy. A pandemic means that economic activity will be lower. Investment markets fall as a result.
This shows that markets don’t react to changes in information. That the efficient markets hypothesis is wrong in fact.