Modern day discussion forums have become more and more binary, it’s either this way, or it’s that way. I get it, you can easily make the argument that the impact from coronavirus will get a lot worse, or it is priced in and will be short lived. In times like this, I generally settle for somewhere in the middle. This article is just a couple of thoughts and observations that I took away from this past week, amidst the headline hysteria surrounding coronavirus. (Disclaimer: I’m not a Doctor, but occasionally I stay at a Holiday Inn Express and I’m an Eagle Scout).
Are the fears real? Yes, the markets have been signaling that for the better part of the last month and a half. The fears revolve around the disruption of global supply chains and the fears it will disrupt consumer trends like traveling for business and/or pleasure; affecting a mess of industries from airlines (down roughly 30% from this year’s highs) and hotels to casinos (down roughly 25% from this year’s highs), restaurants, malls, etc. (consumer discretionary sector down roughly 15% from this year’s highs). This ripples down to the workers who may be out of work or furloughed.
Could this lead to a recession? It is not out of the question. With that said, it seems the markets have priced in more bad news to come and we may be entering peak panic in the States. Does that mean more cases won’t come? No. It means the market is prepared for a significant increase in cases once we can test more people. Aren’t more cases bad? Yes and no. Yes, it’s not good that people are getting sick, but assuming there are thousands more unreported cases, that would drop the fatality rate significantly and start to ease the consumers fears. The only cases we are hearing about now are the severe cases, because that's what sells.
As mentioned in the beginning of the article, the evolution of technology and social media have changed the way we consume and share news, arguably not always for the better. Constant headlines of “More Cases” and “The Death Toll Rises” have created panic that has spread like wildfire, some of it warranted, but likely overdone and nearing exhaustion. Also note that there will always be an increasing number of cases and deaths, once they are reported you cannot subtract them (one of the only things I learned from a Gen. Ed journalism class back in college). Sensational headlines are the name of the game.
Outside of the madness in stocks and bonds, I noticed a few interesting things in the broader market on Friday that may come across as small and meaningless, but I think carries some weight when deciding if we may be near peak panic. One was that Airline stocks finished positive, while Costco’s stock finished negative on the day. Potentially both of overshot fair value in the near term. Number two was Friday’s OPEC meeting. A production cut from OPEC+ was all but set in stone, but Russia was unwilling to come to the table and the whole deal fell through, dropping energies as much as 10%. The energy sector makes up for 5+% of the S&P. This drop undoubtedly added pressure to stocks, but coronavirus got the headline. I also notice that the Shanghai Index has recovered all its losses from the last month and copper, often looked at as an indicator of global growth, hasn’t budged over the last month.
Could things get worse before they get better? Of course. Could the market reaction from coronavirus expose a deeper underlying problem within the economy? Of course. Does that mean we should all go build a bunker? No. I think there will be some great opportunities presenting themselves soon, if not already. I also think it’s always smart to consider diversifying your portfolio. Our Trade Alerts program was up 5.4% in February and is up 10% for the year. Click this link to learn more about Trade Alerts, or email Oliver@BlueLineFutures.com
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