Unlike the illness itself, US equities’ initial reaction to the rapid spread of the mysterious Wuhan virus was largely contained.
The shallow losses on Wall Street hardly count as a “selloff”, especially in the context of the steep declines seen across Asian shares, but any session during which US equities (and particularly tech stocks) don’t close higher is cause for alarm these days.
The most pronounced risk-off move came when CNN first reported that the virus had spread to the US. Washington State health officials announced the first case. Treasurys and the yen were bid on Tuesday, as havens regained their footing amid the jitters.
For the time being, this is just an excuse to take some off the table after a run that saw US benchmarks log record highs in eight consecutive sessions through Friday.
But that strikes at the heart of the problem. When things get as extended as they are now, it doesn’t take much to trigger profit taking. It’s true that momentum-driven markets are hard to stop and liquidity-driven rallies even more difficult to derail, but at the same time, anyone looking for an excuse to ring the register after a fantastic run now has one – an excuse, that is.
Importantly, the prospective economic impact from some kind of pandemic is arguably more tangible than the economic read-through from geopolitical turmoil in the Mideast. The SARS crisis provides some precedent, although things aren’t anywhere near that acute – yet.
“SARS caused widespread economic disruption as fear of infection put people off from shopping, going out for a meal, or taking a holiday”, Capital Economics wrote, in a Tuesday note, adding that for now, they’re keeping their “economic forecasts for this year unchanged, but the spread of the virus is clearly a major downside risk”. If the virus spreads further and more rapidly, countries which depend on Chinese tourist spending are likely to be most affected, the same note reads. That explains why Hong Kong shares were hit so hard on Tuesday.
Paul Tudor Jones weighed in from Davos on a possible collision between the seemingly unstoppable equities locomotive and pandemic fears.
“We are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination”, he told CNBC, in remarks that echoed Stan Druckenmiller’s comments on the risk-asset-friendly combination of easy monetary policy and a burgeoning fiscal impulse.
“It reminds me a lot of the early ’99”, Jones went on to say. “In early ’99 we had 1.6% PCE, 2.3% CPI. We have the exact same metrics today”.
He then marveled at the combination of ultra-accommodative monetary policy and fiscal largesse: “The difference is fed funds were 4.75%; today it’s 1.62%. And back then we had budget surplus and we’ve got a 5% budget deficit. Crazy times”.
Yes, “crazy times” indeed.
But Jones is ready to get crazier. Quizzed on whether now is the time to get off the train (essentially the same question Andrew Ross Sorkin put to Ray Dalio on Tuesday), Jones said no. “The train has got a long, long way to go if you think about it”.
Despite his contention that we may be a long way away from the market peak, Jones sounded a decidedly cautious tone on the Wuhan virus.
“If you look at what happened in 2003… stock markets sold off double digits”, he told CNBC, adding that “if you look at the escalation of the reported cases, it feels a lot like that.”
He continued: “There’s no vaccination. There’s no cure”.
Correct. And you can say the same thing about greed. There’s no vaccination. There’s no cure.