When Stocks are Priced for Perfection – February 3, 2020

When stocks are priced for perfection, the market can become vulnerable to unexpected events. Since early October, market tailwinds have been strong. These include low interest rates and an expanding Fed balance sheet via T-bill purchases, modest economic growth, and subsiding trade tensions.

Market headwinds, well, they have been largely absent, until recently. The unexpected event that has triggered volatility: an epidemic in China. It’s just the right excuse for traders to sell.

The coronavirus has sickened nearly 9,700 people and claimed the lives of 213 people, nearly all in China (MarketWatch as of January 31). The number of cases worldwide has more than doubled since last Monday (Wall Street Journal).

It’s not that we’re facing a serious crisis at home. Odds of such an event remain low. Investor concerns stem from fears the virus in China will interrupt commerce, slow its economy, and possibly pressure global growth, at least temporarily.

The flu vs coronavirus

We’ve seen epidemics before. The World Health Organization declared an emergency during the 2016 Zika virus, the 2009 H1N1 swine flu, and the 2014 Ebola outbreaks. In 2003, we grappled with the outbreak of SARS in China.

However, any direct health or direct economic impact on the U.S. will probably be negligible. However, any possible indirect impact is creating some instability.

The graphics below from Centers for Disease Control and Prevention illustrate the toll this year from the flu versus that of the coronavirus.

Yet, Americans aren’t shy about flying, shopping, taking in a movie, or going to a restaurant.

Further, through January 31, of the 241 people who have been under investigation, 114 have tested negative, and only six have tested positive per CDC.

Clearly, the flu has been a much bigger deal; yet, before the coronavirus outbreak, we weren’t treated to a steady stream of pictures of people wearing protective masks; pictures that can sometimes instill unnecessary fear.

I suspect the number of cases in China will continue to rise, and we may see additional volatility until investor confidence rises that China has the epidemic under control.

Medium and longer-term, the economic fundamentals have the biggest influence on equity prices. Up until last week, that had been the case.

Created 2020-02-03 16:37:55