Coronavirus Fears Trigger Massive Market Sell-Off

By Albert Lu

U.S. markets tumbled 357 points on Friday as the Dow capped its worst weekly performance since the 2008 financial crisis. The U.S. stock index lost 12% for the week, dropping its year-to-date performance to -11%.

Dow Jones Industrial Average. Chart courtesy of StockCharts.com

News of the spreading coronavirus continued to weigh on investor sentiment. By Friday, the virus had infected more than 83,700, with more than 2,859 confirmed deaths. On Thursday, an IMF spokesman acknowledged the global impact of the virus while hinting a downgrade on its global growth forecast may come soon. Meanwhile, Larry Kudlow, National Economic Council Director, urged calm, telling Fox Business that there’s no guarantee cases will “skyrocket” in the U.S.

STOCKS ENTER BEAR MARKET TERRITORY

The industrial impact of the virus has been broad, hampering multiple sectors and markets around the globe. By Friday, all 30 members of the Dow had entered correction territory, i.e., down at least 10% from their 52-week high. Hardest hit have been the companies with exposure to China, particularly in the energy and technology sectors.

Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX), for example, were down 41% and 27% from their respective 52-week highs. Intel Corporation (INTC) and Apple Inc. (AAPL) were down more than 20% from their 52-week highs, adding to the growing list of companies entering bear market territory.

In the case of Apple, the maker of iPhones, the outbreak has been particularly disruptive, affecting both its complex supply chain and Chinese retail demand. Earlier in the month, the company made the decision to close all 42 stores in mainland China as well as their corporate offices and contact centers in the Asian country. It has since reopened over half of the affected retail locations.

Similarly, Starbucks closed roughly half of its 4,200 locations in China, but has since reopened most of them, according to a tweet from CEO Kevin Johnson on Thursday.

MARKET OVERREACTION

While the seriousness of the epidemic is undeniable, some observers question if the market has overreacted.

Barry Bannister, Stifel head of institutional equity strategy, told CNBC that the VIX (volatility) Index, which briefly crossed 49 on Friday, points to an overreacting market.

VIX Index. Chart courtesy of StockCharts.com

“The fear index is at 49? It was 44 in March of 2009 when the world was really coming to an end, in an economic sense. This seems to be a panic, an overreaction.”

Don Luskin, chief investment officer of Trend Macrolytics LLC, agrees and recommends investors instead focus on hard statistics.

“If you look at it by the numbers, the number of infections outside China is still incredibly small — just 2,500 as we speak. The number of deaths is just 37 as of this moment.”

The real danger, according to Luskin, is an extreme policy response — including travel bans and shutdowns — that pushes the economy into recession.

“Too much of that for too long would be a costly economic mistake.”

“How much economic damage do you want the world to take to contain a disease that isn’t really worse than any other disease? — because, it costs lives if you cause a recession. If someone loses their job because of this and they don’t have the resources [to cover medical expenses], what might happen?”

“I’ve been telling my clients to worry more about what the bureaucrats do than the virus.”

GOLD AND U.S. TREASURIES

Investor demand sent gold and U.S. Treasuries soaring in early week trading.

Spot gold surged to a 7-year high as safe-haven flows drove the metal to a session high of $1,688.66. The trend reversed on Friday as panic selling across the board drove down a wide range of assets, including the precious metals. Spot gold plunged 3.6%.

Treasury yields set all-time record lows. The 10-year yield fell 25 basis points on the week to trade below 1.2%, the first time ever. The bond price, which moves inversely to its yield, surged.

The traditional safe-haven assets have been a magnet for investors looking to flee riskier assets.

INTEREST RATE CUTS LIKELY

Current and former representatives from the Federal Reserve were quick to offer thoughts on the possibility of interest rate cuts to soften the impact of the coronavirus outbreak.

St. Louis Fed President James Bullard said additional rate cuts would be considered if the coronavirus reached pandemic status. Former Fed Governor Kevin Warsh told CNBC that a coordinated central bank response would be helpful to buy some time.

For many, a March rate cut appears inevitable. Bank of America expects a 50 basis point cut at the March meeting. Goldman Sachs predicted three rate cuts between March and June.

Meanwhile, speculators of the federal funds rate assign a 100% probability to at least a 25 basis point cut in March.

CONCLUSION: LOOKING BEYOND THE VIRUS

Unfortunately, interest rate cuts, asset purchase programs and other central bank instruments have no influence on virus transmission rates or the willingness of people to shop, work or travel.

Furthermore, the idea of addressing, what is so far, a supply shock with interest rate cuts is analogous to attempting to wallpaper over a missing wall.

Despite the human tragedy and economic fallout of coronavirus, the more serious risk facing investors is the risk posed by inflated asset bubbles. And, while the pin that pricks the bubble may come in many forms — a coronavirus pandemic, liquidity squeeze, credit default, geopolitical event, etc. — the result is always the same.

History has shown that in times of stress, traditional safe-haven assets, such as gold and the highest quality bonds, are an investor’s best friend.