One Simple Reason For The Nightmare On Wall Street

Over the past 72 hours, I’ve read dozens of takes from analysts explaining and otherwise documenting this week’s epic rout on Wall Street.

History will remember this meltdown. Through Thursday, this was one of the single worst weeks for US equities ever. It’s difficult to put it more concisely than that.

Since World War II, the S&P has only fallen 10% or more in a single week four other times: In October 1987, April 2000, September 2001 and October 2008.

Clearly, virus jitters were (again) the proximate cause of the malaise. Goldman’s cautious call on corporate earnings didn’t help and neither did any of the innumerable COVID-19 headlines that crossed throughout the cash session.

By way of update, South Korea reported an additional 256 cases Friday, pushing the total above 2,000. Some of these figures are almost by definition dated as soon as I publish them, but below is a reasonably current cross-country count:

As far as what happened to markets on Thursday, you can, of course, get as granular as you like (and we did, in “Dominoes” and “Bang-On“). But, as I was scrolling through the latest deluge of commentary on the back deck while enjoying my nightly cigar, I was struck by the some delightfully straightforward analysis from JonesTrading’s Mike O’Rourke.

It was immediately clear on Wednesday evening that the market wasn’t particularly enamored with the idea of Mike Pence presiding over America’s virus response, and that displeasure became even more apparent during the European session.

But, as O’Rourke writes, the addition of Steve Mnuchin and Larry Kudlow to the coronavirus response team on Thursday may have been a key factor in explaining the market’s violent selloff.

“We don’t believe it is coincidence that [the bounce] had run its course and faded as headlines passed that President Trump added Treasury Secretary Mnuchin and National Economic Director Larry Kudlow to Vice President Mike Pence’s coronavirus task force”, O’Rourke writes. He then adds the following additional color:

It is not a good sign that the Presidential task force established for a national health emergency looks like the plunge protection team. When people talk about equity market tops and mania, they are usually referring to a widespread popular obsession with stocks. One has to wonder if the President’s unhealthy obsession with the stock market outweighs that of a popular mania. His task force appointments today highlight that obsession. He is in a position to, and has driven policy to facilitate the short term superficial gains. Investors have chased a hollowed out façade disconnected from its fundamental underpinnings. 

If there’s elegance in simplicity, that is an elegant assessment of the situation.

Adding to consternation was a New York Times article which contained the following rather disconcerting account:

The vice president’s move to control the messaging about coronavirus appeared to be aimed at preventing the kind of conflicting statements that have plagued the administration’s response. The latest instance occurred Thursday evening, when the president said that the virus could get worse or better in the days and weeks ahead, but that nobody knows, contradicting Dr. Anthony S. Fauci, one of the country’s leading experts on viruses and the director of the National Institute of Allergy and Infectious Disease.

At the meeting with Mr. Pence on Thursday, Dr. Fauci described the seriousness of the public health threat facing Americans, saying that “this virus has adapted extremely well to human species” and noting that it appeared to have a higher mortality rate than influenza. “We are dealing with a serious virus,” Mr. Fauci said.

Dr. Fauci has told associates that the White House had instructed him not to say anything else without clearance.

Vanity Fair‘s Bess Levin skipped the decorum and called this what it is. “On the darkest of dark sides, we also learned Thursday about a new gag rule requiring government officials to get Pence’s approval before making statements about the virus that could make the president look bad”, she wrote.

On Thursday night, O’Rourke, referencing the same story in the Times, reminded folks that “the simple fact is when investors no longer feel they can trust the policymakers in an environment of growing uncertainty, they head for the exits”.

And head for the exits they most certainly did. This has been the fastest correction in market history.

(Deutsche Bank)

Nothing further.