Will coronavirus kill off the bull market?

It seems clear now the coronavirus will at some point go global. And when it does, will it bring down the stockmarket’s bull market? John Stepek looks at what that would mean.

Airline stocks have slid sharply

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?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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?

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/investments/investment-strategy/600709/the-coronavirus-is-scary-but-its-irrelevant-to-your
Investment strategy

The coronavirus is scary – but it's irrelevant to your investments

The spread of the coronavirus is causing alarm around the world. And, while it could be a serious short-term threat to human health, it’s not somethin…
24 Jan 2020
Visit/519022/money-minute-wednesday-4-december
Economy

Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures

Today's Money Minute looks ahead to the UK's latest all-sector PMI survey, and America's private payrolls report.
4 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Most Popular

Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/economy/uk-economy/601063/the-uks-bailout-of-the-self-employed-comes-with-a-hidden-catch
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020
Visit/investments/commodities/gold/601037/gold-is-on-a-wild-ride-so-should-you-be-buying
Gold

Gold is hard to find right now – so should you be buying?

With demand through the roof and the physical metal hard to find, it's not the best time to buy gold. But right now, says Dominic Frisby, you want to …
25 Mar 2020
Visit/investments/stocks-and-shares/share-tips/601035/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
27 Mar 2020