Welcome the worst week for stocks since the financial crisis. The market is human, so its response is often irrational, and as another 1200 points are shaved off the Dow and the market heads into correction territory, absurd emotions are overtaking fundamentals.
And confusion adds to the market’s irrationality, with CDC warnings contrasting with Trump tweets downplaying the threat and hoping to keep the market from undoing itself.
On February 24th, Trump said everything was under control and the stock market was “looking pretty good”. It wasn’t, but it got a lot worse.
In late 2014, Trump used Twitter to spread fear about the Ebola virus, and to criticize the CDC and weaken the position of the Democrats ahead of mid-term elections:
This time around, with a virus that’s gone beyond many more borders, he’s downplaying the CDC’s warning that it will hit America. But this time, he’s at the helm, and he’s hoping for a strong stock market to boost his election chances in November.
One can only hope that the next virus surfaces during a non-election year.
The public is confused and the market is confused, but it’s decided this time to hit the panic button.
That panic button is leading to all sorts of unusual displays of fear selling.
It’s hitting the market almost across the board, with Goldman Sachs now saying that U.S. companies will post zero earnings growth because of the coronavirus. Goldman lowered its baseline earnings per share estimate to $165 this year, down from $174.
It makes sense that the coronavirus is decimating the tourism industry, and slamming hotels and airlines.
But why tech, and why Silicon Valley?
It seems absurd, but in the age of ultra-globalization, it makes sense--to a point.
Apple and Microsoft have said they might might quarterly revenue forecasts due to shuttered factories, offices and stores and limited travel. Facebook may see delays in its Oculus VR headset.
Things are issues that would usually cause a bit of discomfort for shareholders, but not a panicked selloff. The correction is highly overdone.
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Facebook is down ~$23 a share in five days simply because Zuckerberg cancelled a few conferences (that won’t affect the bottom line) and because maybe the Oculus VR headset will be delayed in production. That’s an overreaction to beat over-reactions.
Adding to the list of absurdities is the sudden faith we have in miracle cures. It no longer matters if a healthcare company is fundamentally solid--it just matters that they claim to be working on something related to the coronavirus.
Moderna Inc (MRNA)--a company no one’s heard of until this week--is a clinical stage biotech company that’s enjoying a huge run in the headlines now. Earlier this week, it said it’s experimental COVID-19 vaccine was ready to be tested on humans.
The stock gained 50% in five days, peaking today at $35.47 because it started to lose ground. Today, it was down 11%. That’s still a huge gain, but what happens is that a ton of people jump on this ride, take the quick win, and then bail. No one wants to hold a risky biotech company for too long--even in the middle of a potential ‘epidemic’.
But for other healthcare stocks, the opposite is true. It’s either the specter of Sanders or Warren winning elections that pummeling them right now, or it’s the coronavirus itself--despite the irony. For these healthcare giants, it’s a double whammy.
Among the 10 hardest-hit industries over the coronavirus, you might be surprised to find clothing and luxury goods among them: but this, too, makes sense because of the China connection. China accounts for 40% of all exports in textiles and apparel, and chain stores in China have been forced to close their doors in many cases and clothing revenues will take a huge hit.
For anyone not succumbing to the populist panic, it’s probably a great time to start shopping around for deals that we haven’t seen in a very long time because this “correction” isn’t at all about FAANG valuations, it’s about fear most of all. In that sense, it’s not a true correction.
But the big lesson here for anyone who hasn’t caught on entirely to the sway China has over global markets is this: If you want to disrupt every single industry on the planet and bring markets down, a virus that starts in China and spreads elsewhere is exactly what will do it.
By Michael Kern for Safehaven.com
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