Saturday, February 29, 2020

Market Decline Driven By A Panic Narrative

If there is one factor most disappointing about the coronavirus (COVID-19) outbreak, it is the panic narrative that seems to have overtaken a more rational narrative. This panic narrative is certainly contributing to the negative equity market reaction. In a tongue and cheek Saturday MarketWatch comment by Tom Lee, founder of Fundstrat Global Advisors, he notes one of the factors impacting the market may be investor concern of, "A meteor or alien invasion to end global existence has been spotted but its arrival is unknown (or a virus pandemic.)"

A couple of articles have been written about 'community' spread of the virus, that is, someone contracting the virus but did not have contact with a known infected person. An article appeared in Friday's Wall Street Journal and one on Slate's website. The Slate article, Why the Silent Spread of Coronavirus Might Actually Be a Good Sign, notes the death rate may be lower since there appears to be infected people that do not show significant symptoms. As stated in the article,
"If this turns out to be common, it’s a good thing. It implies that the case fatality rate—the number of deaths divided by the number of infections—of this novel coronavirus is likely to be far, far lower than the reported statistics."
In terms of a more rational perspective, I concur with Ken Langone's comments on CNBC late last week,
"The rapid stock market correction since the Dow Jones Industrial Average’s record high earlier this month 'far, far surpasses' the severity of the outbreak, Langone told CNBC on Friday. 'What I see more as a problem than anything else is this panic. And there is a panic going on if you look at the market.' He added that the virus’ risk to the U.S. is being overblown."

This overblown reaction has led to an increase in bearish market sentiment, which seems to be the primary narrative at the moment. I am reading comments like,
"My gut says market not 'great' buy until people wake up one day and say -did you see where Apple (AAPL) is trading, holy moly. I think that's a good day to bottom and buy the dip."
Investors would be wise to keep in mind that a bell does not ring at market bottoms or market tops. Negative sentiment like the above historically takes hold near market bottoms though.

In just one month, CNN Business' Fear & Greed Index has moved from a Neutral sentiment level to Extreme Fear. In late December last year the Fear & Greed Index was firmly in the Extreme Greed zone.

Eric Balchunus, an ETF Analyst for Bloomberg commented on the record dollar volume traded in the SPDR S&P 500 ETF (SPY) on Friday. This elevated volume occurring in a down market might just be a sign of investor capitulation. Further, it does show the risk of index investing in that the elevated selling is pushing down a wide range of stocks. Eric's note highlighted,
"History was made today [Friday] as SPY became the first security to ever trade over [$128b] in a day. An absurd amount of activity that speaks to the deep level of fear in the market and gravity of situation. (for context AAPL's [average] daily volume is like $6b). Also, ETFs as a whole traded $414b, 4x their [average], blows away old record. They also accounted for 43% of all equity trading volume today, normally it's about 25%."

If there is any concern about this virus and the accompanying negative narrative it is the issue that  the negativity can feed on itself. This negativity can cause a change in consumer behavior that may lead to a weakening consumer and hence a potential headwind to economic growth. In spite of this, Cornerstone Macro's daily confidence survey is indicating no recession at the moment. Additionally, one of their survey's shows Americans do not expect the next recession until the third quarter of 2022.

In summary, data and research seems to indicate China activity is picking up again. I have talked with a person that does business in Wuhan and they are indicating activity is picking up too. Other parts of China seem to be improving as well. Port activity in Zhoushan is picking up, last week Apple announced a reopening of more than half their stores in China, GM began reopening its 15 assembly plants a few weeks ago, Ford is doing the same. The point is activity is beginning to return to normal.

Certainly the coronavirus (COVID-19) outbreak should be taken seriously, but common sense hygiene practices can significantly reduce the risk of any potential infection. I also believe it is not the end of the world event that some headlines may be suggesting which has caused an overreaction resulting in excessive stock market selling. If one is truly a long term investor, this situation has likely created a buying opportunity, knowing it is difficult to predict market bottoms.

Disclosure: Firm/family long AAPL

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