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”.
Maybe. Assuming you’re penciling in another dot com-type, blow-off top. But, as documented extensively over the past two weeks (see here and here), this is rarefied air:
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.
Read more: Dalio Reprises Infamous ‘Cash Is Trash’ Call, Raising Specter Of 2018 Rout
H-Man, the train may have a long way to go but there are some curves that are down what treacherous. Hit the curve at high speed, throw in some ice, with a dash of an overload, you derail. The issue is how bad will the pile up be.
Dalio & Jones are speaking from the “snow globe” hedge fund perspective. Hedge fund returns have been abysmal in recent years. They been under-allocated to equities and are now piling in. Now they would like you to join them and save their businesses and careers.
PTJ is very smart so to hear he may be betting on it continuing at this point is odd. What were his returns last year? Why so confident now vs bearish then? Sure monetary policy is different but fundamentals may actually be worse. Low biz inv for the past year (impacts future productivity – earnings), higher valuations, rates one way to go, an election where DS may have more influence, continued deterioration in bal sheets, closer to full employment, how much better can the consumer get.
I realize in manias rational thinking is relegated to the back of the train but is everyone smart enough to get off before it wrecks?
It feels like bears are either hibernating or extinct. I have seen this movie too often and I am not smart enough to bet on people becoming more irration in the hopes I can squeeze more profit. If I see an uptick in profits (innovation, productivity) and better economic fundamentals I could change but relying on easy monetary policy is not for me.
Enjoy the ride