Moving Markets

It’s never easy to see stock market indexes like the Dow opening down 400 points or more, especially on a Monday. Not a good way to begin the week, that’s for sure. This is especially true after a prolonged period where stocks mostly just went up. But as with any market swing it’s best to step back and assess the situation instead of simply reacting. Other investors do that enough for us anyway, so we don’t want to join them and make things worse.

So far this week (and toward the end of last week as well) stocks are primarily reacting to the outbreak of coronavirus in China. This brings back memories of the deadly SARS virus in 1993. That outbreak spread around the globe for about six months and claimed almost 800 lives, according to the CDC. The Chinese were criticized at the time for being slow to respond and opaque about the process. China’s government seems to be much more proactive this time around, shuttering roads, rails, airports, and even extending its New Year holiday season to keep people off the streets.

This situation is obviously very concerning and potentially dangerous. We don’t know how long or how widespread this outbreak will be. Hopefully it won’t be as bad as some are suggesting. But from my limited perspective, it’s interesting to watch how markets respond to situations like this. The Chinese economy is the world’s second largest, so any significant disruption in its system is going to create ripple effects throughout the world, which is part of the reason we see markets dropping in the short term.

Along these lines, I wanted to share the following excerpts of commentary I received from my research partners at Bespoke Investment Group yesterday morning. The first snippet is about the market reaction and the second is about the virus itself. The bottom line at this point, I think, is that stocks had been up for awhile without a meaningful decline and needed an excuse to fall a bit. The outbreak, and other issues, certainly provided it.

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Equity Selloff: The coronavirus is being used as the “handy excuse” for the current equity market selloff, and while greater fears over the transmissibility and current spread of the virus in China relative to Friday are justified, there are two other factors we urge investors to consider. First, simple technicals.

Equity markets had been on an incredibly impressive streak of higher highs and overbought conditions. While not as long as the streaks ending in March 2017, January 2018, and October 2018, the recent streak of 74 trading days without a 1% drop was still a lot of time for markets to get over-extended. Timing when and why those sorts of moves come to an end is nearly impossible but understanding that a technical consolidation is taking place can help investors keep a level head about why it’s happening.

Second, we can’t help but ignore the fact that Bernie Sanders is surging in the polls. While betting markets are often wrong (for instance, at one point pricing Elizabeth Warren at >50% likelihood to be elected last fall!), Sanders now trades more than ten percentage points above Biden after a string of very positive Iowa polls and other signs of momentum in New Hampshire and national polling. We have no forecast for whether Sanders will win, but in our view the sentiment shock to markets of potential for a socialist President is just as material as coronavirus. Sanders’ outperformance could reverse, but if it doesn’t we still suspect the sentiment shock would be larger than any actual Sanders Presidency given Republican control of the Senate and Supreme Court. We think it’s impossible to specifically attribute a given factor to size of the equity market decline, but both of the above—and not just the coronavirus—are contributing to the push lower in prices.

Coronavirus: Chinese officials are scrambling to clamp down on internal movement (reducing potential spread) and not create panic. Within the city of Wuhan, shops are still open this morning and Premier Li has visited; it’s important not to misunderstand the threat of the nCov [the scientific name indicating a “novel” strain of the virus] virus as a catastrophic, biblical apocalypse. That said, an estimated 5mm people left the city before the lockdown of travel. New cases reported in the US are also sparking fears.

We are not epidemiologists, but we would offer a couple of observations related to the spread. We are not aware of any disease clusters (that is, multiple people infected and spreading the virus) outside of Wuhan itself. For instance, both cases reported in the US were people who travelled to Wuhan specifically. At this point there are no cases in the US (or again, in any other country we are currently aware of) where the disease was caught from a secondary source. Given the likely scale of the spread in China, it’s probable that will change, but without major secondary disease clusters, it’s unlikely high transmissibility estimates that are currently getting a lot of negative attention are correct. With global authorities on alert now (regardless of whether or not the World Health Organization has actually declared a Public Health Emergency of Immediate Concern) and awareness about symptoms rapidly spread, it will be harder for new cases to create new infection clusters if nCov is even capable of that sort of rapid spread.

We also note that observed mortality from the disease is far, far lower among healthy adults than among the elderly and very young. Even if that doesn’t mean transmissibility is lower, the overall concern from the virus should be at least partially measured by its mortality rate and that does not appear to be spectacularly high.

One final note: we strongly urge caution about extrapolation of comments that do not acknowledge the shifting circumstances, data, and inherent uncertainty about the coronavirus. Immediately discount commentary from any person that involves all-caps, profane, or apocalyptic language. Pay closer attention to public health officials and epidemiologists, especially those who do not have a public following or image which may benefit from aggressively negative commentary. Of course, these are also good rules of thumb for any sort of markets commentary as well!

Have questions? Ask me. I can help.