OK, so coronavirus isn’t a re-run of the Sars epidemic in 2003. It’s worse. Markets have been too relaxed about it. Now that it’s hit Europe (and we’ve also seen a case in the US that doesn’t seem to be connected to foreign travel), they are repricing the consequences rapidly.
So how does this change the outlook?
Let’s assume the coronavirus is going to “go global”
I don’t think it's unreasonable to assume that coronavirus is now going to “go global”. I mean, how do you contain it?
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Oil group Chevron's office was shut down in Canary Wharf yesterday, and everyone – roughly 300 staff – were sent home to work remotely, after one staff member reported flu-like symptoms. But how do they all get home? Mass transit of course.
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I don’t believe the HR department sent round an email saying “Go forth and multiply” as they cleared the premises, but they might as well have done.
And loads of people have just been on half-term holidays. You think that every single one of them is "self-isolating”? Nope, I don’t either.
And even if coronavirus doesn’t spread outside of China to the same extent, then we’re still looking at a knock-on effect from the fear of the spread. If you haven’t already booked a holiday this year, are you in any real rush to do so now? Are you thinking twice about any trips to London (if I didn’t work here, I would be)?
If you answer those questions honestly, I think you can see pretty quickly why this will have at least some economic impact.
(By the way, it’s entirely rational to avoid taking unnecessary risks. A lot of people like to sneer at headline panic, but if working remotely or delaying trips costs you nothing, then the risk/reward trade off is pretty clear. The economic issues arise when everyone thinks like that, but I don’t see a big queue of people lining up to take one for the team, do you?)
Of course, the market is already pricing in at least some of this damage – in some cases maybe even too much. Airline stocks have slid sharply, and no wonder. KLM and Lufthansa are looking at cutting planned spending and freezing or slowing recruitment, according to the FT.
You’ve also got the oil price tumbling hard. I still feel that oil’s collapse has to create an inevitable buying opportunity (we still need oil, and if all of the producers of oil are going bust or trying to turn green, we’ll end up not having enough). But I can also see that it’s the logical trade for now.
There are some minor things that I’m slightly baffled by, I must admit. The ongoing resilience of the palladium price is one of them. I get that it’s the metal of the cars of the future, but at the end of the day, that makes it an industrial metal and if industry is getting whacked by the virus, then I’m not sure how long it can stay at such elevated levels.
I’m not saying you should short it (trying to pick turning points is a bad habit to get into, because most of the time you’ll be wrong and get flattened by momentum). But if you’ve been long and you’ve made a handsome profit, consider a stop loss at least.
In all, I’d suggest, as I’ve done during previous corrections, that you keep an eye on your watch list and see if you get an opportunity to buy stocks you’ve wanted for a while. Just remember to sense check your rationale in light of the outbreak.
Will coronavirus bring down the bull market?
A bigger question is probably this – is coronavirus the wall that the long post-2009 bull market finally runs into? And what would that mean?
That’s a much tougher question. There’s a certain irony at work here. Everyone has been fretting about the effect of trade wars and “populism” (however you want to define it) on our globalised world. So far, that’s been more of a slow-burn problem than the protectionist race to the bottom that some had feared.
Now along comes coronavirus, and suddenly it’s testing all of the fragilities within our globalised system that we’d been worrying so much about.
We’ve been worrying that tech companies have too much power. But now they’re the ones that are among the most heavily exposed to the impact of the virus, what with all of those supply chain vulnerabilities. Apple warned on sales earlier this month, and now Microsoft has joined them.
Tech companies have led this bull market – is this what brings their wild run to an end?
Meanwhile, the US government’s cost of borrowing for ten years has hit its lowest level on record, descending to below 1.3% this morning. In other words, investors are piling into the safest, most liquid asset most of them can find – US government bonds. That indicates fear of recession at the very least – or of a Japan-style “Ice Age” at the very worst.
On the other hand, this is the US election year. Donald Trump is now starting to get edgy about the coronavirus because the stockmarket is going down. If you’re an incumbent president in the US and you want to get re-elected, you don’t want the stockmarket going down.
Can he do much about it? He can certainly try. More spending. More pressure on the Federal Reserve. Declaring emergencies where needed.
To be clear, I am not a fan of the idea that looser monetary policy can “solve” everything. I think that overall there’s a good chance we’ll find it does more harm than good.
But I also think you have to be naive, and somewhat in denial about events of the last decade, to not accept that another central bank splurge would have no impact on asset prices.
The solution for investors on that front is easy. As Dominic wrote yesterday, gold’s bull market predated the coronavirus and I would expect it to continue as and when this passes. And at least one reason for that is because it will have brought conditions for a massive fiscal and monetary stimulus yet another step closer.
