The exogenous shock of coronavirus has now spilled over into the real economy.
Equity markets as a predictor of recessionResearch has shown that the U.S. economy tends to fall into a recession when two criteria have been met: (1) a decelerating rate of real GDP growth falls to about 1% or lower per year, which sets the stage for (2) the likelihood that an unforeseen event or monetary or fiscal policy error becomes the catalyst for pushing the economy into outright recession. The metaphor for thinking about this is the single drop of water falling into an ice-cold pond, which then becomes the catalyst for the pond turning into a sheet of ice. The catalyst for turning sluggish slow economic growth into a recession can be anything from the start of a war, an oil crisis, or the bursting of a financial bubble. The adverse event then leads to a loss of confidence in the ability of the monetary and fiscal authorities to control the crisis or to create the climate for the restoration of normal economic behavior and growth, which is precisely where we find ourselves now. In this latest cycle, the focus of the world turned from the trade war with China and the pre-existing manufacturing recession to the coronavirus crisis and its implications for the whole of society.
The past 10 days have seen the single-worst decline in stock market history.