Market Decline Driven By A Panic Narrative

Summary

• 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.
• Certainly the coronavirus outbreak should be taken seriously, but common sense hygiene practices can significantly reduce the risk of any potential infection.
• If one is truly a long term investor, this situation has likely created a buying opportunity, knowing it is difficult to predict market bottoms.

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

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[fully awake]

Keep fiddling. Rome is burning. Which is worse? Coronavirus or a communist winning Democrat primaries?

[Lord100]

SELL ALL RALLIES. Mkts over vaule more then anytime in history.

There is too many problems for the very over valued mkts.

-- MASSIVE debt, most over valued mkt. And overleveraged mkt ( corp debt 17Trillion, fed debt 25Trillion world wide debt 300trillion 330% of gpd)

-- Carona virus will have massive impact on companies cashflows and tax collection govt future reducing ability of govt to help.

-- future reduction of cash flows resulting in less buybacks.

-- FED is desperate now so reduced rates, as corporates saw a freeze in credit mkts, past week high debt mkt froze. Banks will not lend to risky companies

-- Major economies are impacted massively, china, india, South Korea, Italy etc appl will take a big hit so will.many companies.

-- big tech regulations which make up 20% of US market. Trillion dollar companies like appl, msft will be sold due high valuations , liquidity issues and forced selling by some 700 etfs and lack of institutional interest for TRILLION dollar companies.

-- There are no shorts to cushion this mkts.

-- Outsize impact due to big drop in sales in china, japan, sout korea, europe, now india. Slowly us as well.

-- US companies refinancing needs 1 trillion this year alone to payback old debt.

-- Repo mkts problems and feds are reducing support for repo mkts.

No reason to be long this mkt. SELL rallies mkts hardly down 10% after a huge run up since oct 30%

[dioscillator]

driven by trump

[User 50039191]

Driven by leftist media agenda. Impeachment didn't work? That's okay, let's blame Trump for coronavirus and take quotations out of context to damage his reelection chances.

[User 49222261]

So not panicing means blindly taking losses of any magnitude and pouring money in at any valuation? Wall Streeters encourage ordinary people to "invest" as they themselves collect fees on the funds. No investment, no fees.

[MAYHAWK]

You do realize that you don't have an actual loss until you sell, right? Held through 08-09 with some bargain buying and back to a huge profit by '11. This is just another weeding out of the weak hands and an opportunity to pick up bargains. The media-driven panic is ridiculous. Common sense precautions will win out in the end. This is not 1918-19.

[tlapp]

The hype is standard for networks. The more ominous the higher the ratings whether a virus, or a natural disaster. Add in the desire for much of the media to tie it to Trump in an election year and you have lunacy.

[Steady Income]

I recently added to BEP, BIP, SON, CSCO, MMM, GPC, PRU and ORI. Love those dividends!

[Peter Cooper]

If this were a market bottom rather than a dip from a hugely overvalued top then you would be right. Sadly this is not the case.

[User 50039191]

Thank you for some common sense. It feels as though some people have absolutely lost their marbles lately exacerbated by extreme partisan animus.

[Wiekierc]

"the panic narrative that seems to have overtaken a more rational narrative."

hmmm...Kind of like FOMO overtaking high valuations but in reverse.