Right now, it does not appear that there are any silver bullets to stop the virus. The most effective techniques appear to be an extension of the proven method of quarantine. Realistically, virus spread will not stop completely, rather the idea is to keep the number of cases at a level that the medical system can cope with them.
It appears that social distancing has done its job in Asian countries that were first hit, but we have not seen how western countries will cope. (For example, I have already seen reports of people ignoring self-quarantine orders, but attitudes may change quickly once domestic cases pile up.)
Right now, we know that supply chains were highly disrupted in China, and other countries are still working through inventories. It seems likely that that lagged supply chain problems will coincide with any quarantine-like methods that are imposed elsewhere. As such, production will take a hit. Moderating this is the reality that demand would also be suppressed as a result of shutting down activity.
Non-targeted attempts to stimulate aggregate demand -- e.g., interest rate cuts, tax cuts -- are unlikely to be powerful enough to overcome this likely drop in activity. People who cannot work are not going to produce output. The more effective response will be support people and firms whose income is directly curtailed by the slowdown. We are starting to see some measures of this sort (e.g., Italy suspending mortgage payments by households, movements towards paid sick leave).
On paper, one might expect a rebound in activity after quarantine-like measures are lifted (whenever that occurs). This should point towards only a temporary disruption in activity, and theoretically should not effect equity valuations (which are supposed to be based on discounted cash flows going out to infinity). However, even if aggregate activity bounces back, that does not imply that every firm will participate. In particular, the firms in equity indices could easily underperform aggregate activity.
- Over-leveraged firms (e.g., firms managed by private equity) might not survive any cash flow interruptions. Although we can expect policymakers to throw bailout money around, not every firm will get its nose in the trough.
- I am not an industry expert, but I am not very confident in the prospects for the fracking industry. A reversal in fortunes for fracking could blow a hole in capital investment in the United States. (The prospects for Alberta appear similarly dim.) Energy supply will eventually get into line with demand, but typically oil price movements are much more rapid than the move to a new equilibrium.
- Tourism and hospitality industries may be in rough shape.
The possibility exists that Western countries will take an interest in returning some key supply chains to be domestically sourced, which would help the prospects for capital investment.
If other countries follow the lead of Italy, policy responses will kick in as the hospitals fill up. In countries other than the United States, health care is largely under the purview of the government, and so an emergency cannot be blown off. (The situation in the United States is more awkward, as the left and right can point fingers of blame at the private/public sectors respectively. That said, it is hard to see paralysis continuing too long in a presidential election year.)
(c) Brian Romanchuk 2020