Pandemic Fears Strike Wall Street

Fred Imbert and Eustance Huang of CNBC report the Dow falls 350 points to cap the worst week for Wall Street since the financial crisis:
Stocks tumbled once again on Friday, adding losses to the market’s worst week since the financial crisis, as worries over the coronavirus and its impact on the economy continue to rattle investor sentiment.

The Dow Jones Industrial Average dropped 357.28 points, or more than 1%, to 25,409.36. The 30-stock Dow briefly fell more than 1,000 points then rallied into the close in a wild trading session characteristic of the week. The S&P 500 slid 0.8% to 2,954.22. The Nasdaq Composite closed flat at 8,567.37 but fell as much as 3.5% on the day.

For the week, the Dow fell more than 12% — its biggest weekly percentage loss since 2008. On a points basis, the Dow fell more than 3,500 points, far and away its largest weekly point loss ever. It also ended the week in correction territory, down 14.1% from an intraday record high set Feb. 12. The S&P 500 lost 11.5% week to date in its worst weekly performance since the crisis. The U.S. stock benchmark is off about 13% from its high notched just last week. The Nasdaq lost 10.5% this week and was nearly 13% below a record high.

“The reason it happened so quickly is because the momentum going up was so great,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “The hedge funds, the algorithmic trading, the quants: They play on momentum.”

A pledge by the Federal Reserve late Friday eased the market’s pain slightly into the close.. Fed Chairman Jerome Powell said in a statement the central bank will “act as appropriate” to support the economy amid the coronavirus outbreak.

“What we have right now is a very scary global health scare, that has caused complex supply chains to stall,” said Art Hogan, chief market strategist at National Securities. “As such we have a supply shock currently. Easier monetary policy could help if we were to evolve into a demand shock with the economic damage the follows the path of COVID-19. Rate cuts are not only the wrong prescription for what ails the economy right now, they are bad medicine longer term since they could raise prices without a supply response.

Yields plunge

The major averages were under pressure on Friday in part because investors kept adding to their bond-market exposure and fleeing equities. The benchmark U.S. 10-year Treasury yield touched a fresh record low. It was last at 1.14%. Yields move inversely to prices.

Among the latest coronavirus headlines the market was responding to, a Google employee tested positive for the coronavirus, the company said Friday. New Zealand and Nigeria reported overnight their first coronavirus cases. South Korea, meanwhile, confirmed more than 500 new cases. China reported 327 additional cases.

Boeing and JPMorgan Chase were the biggest decliners in the Dow on Friday, dropping more than 4% each. Apple slid 0.1% but briefly entered bear market territory.

The Cboe Volatility Index, also known as Wall Street’s so-called fear gauge, hit a high of 47.15, its highest level since February 2018. It last trade around 41.

“People have been so preconditioned to buy the dip and to always expect the market to recover that people can get smacked around with moves like this,” said Patrick Hennessy, head trader at IPS Strategic Capital. “No one knows how this thing ends.”

Travel stocks Norwegian Cruise Line and American Airlines are among the worst-performing S&P 500 stocks this week, dropping more than 20% in that time. Las Vegas Sands has lost more than 10% week to date. Regeneron Pharmaceuticals is the only S&P 500 component that is higher for the week.

“The timing of this was just the worst with respect to investor sentiment being elevated,” said Doug Ramsey, chief investment officer at The Leuthold Group, referring to the coronavirus outbreak. “I’m not sure that the market has really priced in the potential economic impact of this.”

Concerns over the coronavirus have also led several companies to issue earnings and revenue warnings. Microsoft said Wednesday one of its key divisions may not meet the company’s previous revenue guidance. PayPal also warned about its outlook on Thursday.

Goldman Sachs’ David Kostin warned U.S. companies will see no earnings growth this year. “Our reduced profit forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, disruption to the supply chain for many US firms, a slowdown in US economic activity, and elevated business uncertainty,” said Kostin, the bank’s chief U.S. equity strategist.

The outbreak has also raised questions over potential intervention from central banks around the world. Kevin Warsh, a former Federal Reserve governor, told CNBC’s “Squawk Box” he expects global monetary policy makers to take action soon in response to the virus spreading. However, St. Louis Fed President James Bullard said rate cuts are only a possibility if the coronavirus turns into a pandemic.
Myles Udland of Yahoo Finance also reports on how one stunning chart shows how severe this selloff has been:
[...] one chart from Deutsche Bank’s Torsten Sløk shows just how severe this decline has been and makes clear to investors that the coronavirus selloff doesn’t just feel like a unique market event — this time really is different.

A little over a week ago, on February 19, all three major indexes closed at record highs.

Strategists earlier this month made the case for staying “irrationally bullish” in this market. The S&P 500 had become in the mind of some investors a “safety trade” amid uncertainty over coronavirus and a freezing of the global economy.

And then the story changed completely.

Research from Goldman Sachs published late Wednesday noted that since World War II, the average S&P 500 correction sees stocks drop 13% and takes place over eight weeks — four weeks down, four weeks back up.

Bear markets, which are defined as drops of more than 20% from recent highs, see stocks fall 31% on average with a duration of 37 weeks — 14 weeks to the lows, 23 more weeks to recover losses.

The coronavirus selloff, however is in a category of its own.

“In recent years, with rising vol of vol, drawdowns have been faster and sharper which is in part due to positioning,” Goldman notes.

And so in some sense, this decline we’re seeing in the market is part of a longer-term trend towards faster, more violent dislocations in markets. Market events around 2016 political events, volatility blowups in February 2018, and the coronavirus market moves are unique events but also of a piece, a representation of how quickly risk is priced in the modern market.

But this is of little comfort to investors that have seen trillions of dollars in value wiped out of global stocks in just a few days.
A few quick comments from me in regards to this selloff and then I will dig a little deeper:
  • First, I was surprised about just how complacent the "market" has been in regards to this novel coronavirus. It was a month ago when I wrote my comment on the seemingly unstoppable US stock market where I highlighted research showing asymptomatic transmission from this novel coronavirus (COVID-19) and I warned my readers to prepare for the worst as this thing can easily spread all over the world. Importantly, we have only seen the tip of the iceberg with COVID-19 and as testing becomes more widely available, I expect figures will soar all over the world, including in the US. To my amazement, the market ignored the science and kept melting up as algos gunned for Nasdaq 10,000 but this week shows us that what goes up fast, comes down even faster.
  • On the speed of this correction, Liz Ann Sonders, chief investment strategist at Charles Schwab is absolutely right: “The hedge funds, the algorithmic trading, the quants: They play on momentum.” Momentum is fine on the way up, you look like a genius trading Tesla (TSLA), Virgin Galactic (SPCE) or whatever hot stock is going parabolic but when the music stops, these algos run for the hills and some of them even switch to shorting stocks. Also, there's no question big hedge funds were herding into the same big tech names, and that concentration risk never ends well. Moreover, there's also no question commodity trading advisors (CTAs) and large leveraged trading outfits engaging in huge speculative carry trades got clobbered this week, exacerbating the downturn.
  • Speaking of carry trades, you all need to read a fairly new book, The Rise of Carry, to really understand why carry trades are having a huge impact on markets and how they're deflationary and exacerbate inequality. This morning, I was watching CNBC and someone commented how the average 401(K) account in the US was at $112,000 before this week and has lost $12,000 this week. My thoughts? That's not a lot of money to retire on and most people lost a bundle because they were way too exposed to stocks. Some will sell at the wrong time but if it's a matter of selling or sleeping well at night, I say sell because that means you have way too much stock exposure and nobody knows how bad this new coronavirus will get. I've long told my readers to ignore Warren Buffett and others bearish on bonds and that bonds alone will save your portfolio from getting scalped when it hits the fan, like this week. Long bond yields hit a record low today as investors fled to safety but this rally in bonds may be an overreaction.
  • Let me end with some positive news, it is the end of the month, so a lot of big global pension funds like Norway’s government pension fund which had a stellar year last year will be rebalancing their portfolios to sell bonds and buy stocks, but I warn you, even they don't know how bad this coronavirus nightmare will get in the near term. Still, large pensions which pool investment and longevity risk have a long investment horizon and they will rebalance their portfolio after such a drastic move in stocks, especially if the rout continues. Record low bond yields and the plunge in asset prices is the perfect storm for pensions and many will need to rebalance and take more risk to make their target return. Hopefully, they will be right.
  • Another positive is you can bet central banks are going to be holding emergency conference calls over the weekend to try to coordinate a major announcement on slashing rates and governments will follow suit with massive fiscal stimulus to try to mitigate the effects of coronavirus on the global economy. Will it be too little too late? Probably but they won't sit idle because their biggest fear is another financial crisis and global deflation. That's why Jerome Powell came out this afternoon to ease fears after a terrible week.
Having said all this, there is something else that really bothered me on Thursday and I even tweeted about it. To my amazement, the White House effectively muzzled Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases and the country's preeminent expert on infectious diseases:

I understand, Trump is trying to shore up confidence so the stock market doesn't plummet further and seriously hurt his chances of reelection, but it's simply outrageous and ridiculous to have the director of the NIH clear anything by Vice President Pence. The stock market didn't like that and in my opinion, they made a bad situation far worse.

Now, let me get into some charts I was watching this week as this rout unfolded. First, let's look at the one-year daily charts of the S&P 500 ETF (SPY) and the Technology Select SPDR Fund (XLK):

As you can see,the S&P 500 ETF sliced right through its 50 and 200-day moving average and is now testing its 400-day moving average. The S&P Technology ETF is testing its 200-day and you saw a lot of action in shares of Apple (AAPL) and Microsoft (MSFT) today as bulls desperately buy those two companies which make up 40% of this ETF.

Now, let's have a look at the 5-year weekly charts of the same exchange-traded funds (ETFs):

The reason I like to look at longer term charts is it gives me longer term perspective. Here I am using the 10, 50 and 200-week moving averages because these are the moving averages I typically look at when looking at weekly charts.

Anyway, looking at the weekly MACD, it's a bit scary because it tells me this market rout has further to go to become oversold on a weekly basis even if we get a bounce off these levels, which I fully expect.

All eyes are on technology stocks because when you look at that weekly chart, as long as they can bounce off their 50-week moving average, the entire market is fine, but if tech stocks melt down, watch out, it's going to get really ugly fast, we will experience a crash that some have been warning of.

Again, I'm NOT saying this will happen as central banks and governments will do everything in their power (including buying stocks) to fight a financial meltdown and avert global deflation, but you need to really watch those tech stocks carefully because if they continue to slide, this market is in much deeper trouble.

One good piece of news today was that chip stocks rebounded as the broader market kept bleeding out, led by powerhouses like NVIDIA Corporation (NVDA) which actually came back strong today:

Next, have a look at how S&P sectors performed this week, over the past month, and year-to-date:

As you can see,it's pretty much a bloodbath everywhere, even in safe defensive sectors like Utilities (XLU), Real Estate (XLRE) and Consumer Staples (XLP).

But what I really want to show you is how badly Energy (XLE), Financials (XLF), Materials (XLB) and Industrials (XLI) have performed this week and over the past month. So much for all those gurus warning us last week to switch away from growth stocks into value stocks.

In fact, value stocks (VTV) keep sinking further into the abyss and my fear is that growth stocks (VUG) are next:

This is why I told you last week in my comment on whether the market has met its match that I'd ignore all these factor investing gurus as most of them aren't able to predict which sectors will outperform going forward.

We shall see what next week has in store for us but don't be surprised if the bulls come roaring back. Still, there remain too many unknowns with this novel corornavirus so when I hear people calling for a snapback rally, I think they're dreaming, but you never know as there's plenty of liquidity out there to buy risk assets and after this weekend, there may be even more.

However, if this turns out to be a full-blown global pandemic, which in all likelihood it will be as testing becomes more widely available, be cognizant that this crisis may be different from anything we have ever experienced before:

The scariest thing that can happen is the Fed cuts 25 or 50 basis points and the market keeps sinking further because the news on this novel coronavirus goes from bad to much worse.

Of course, if the news turns out to be a lot better than what people expect, all that liquidity will drive risk assets higher which is why some think you need to position yourself for the reflation trade now.

Please note I'm taking a week off. I might come back next week to discuss markets but not making any promises.

Below, CNBC's Bob Pisani went over some interesting figures this morning before the market open.

Second, Kevin Warsh, former Fed governor who is now serving as the Shepard Family Distinguished Visiting Fellow in Economics at Stanford University's Hoover Institution, joins "Squawk Box" to discuss his recent Wall Street Journal opinion piece titled "The Fed can't wait to respond to the coronavirus."

Next, Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton School, joins CNBC's "Squawk on the Street" team earlier today to talk about investing strategies amid coronavirus fears that are spiking markets. Professor Siegel warned that earnings might plunge 30% this year if things get bad, but true to form, he still recommends stocks for the long run.

Fourth, Lindsey Bell, chief investment strategist at Ally Invest; John Spallanzani, Miller Value Partners; and Gabriela Santos, JPMorgan Asset Management, join 'Closing Bell' to discuss markets.

Last but not least, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, was on CNBC earlier this week to discuss the latest on COVID-19. Listen carefully to Dr. Fauci, more than anyone, he says it like it is and doesn't sugarcoat this virus.

Update: New coronavirus cases in California, Oregon, and Washington suggest community spread. Dr. Amesh Adalja, a Pittsburgh-based infectious disease expert, appeared on CNN Saturday morning stating: “Right now, we've come to the conclusion that this virus is not going to be contained. So that means every country, every location really needs to prepare.”

Dr. Adalja is a senior scholar at the Johns Hopkins Center for Health Security, and works on pandemic preparedness, emerging infectious diseases and hospital preparedness. You can read a recent interview with him here where he goes into more detail and states the following:
"The biggest thing the United States needs to do right now is move from a mentality that’s tried to contain this virus to one where they’re starting to work on mitigating the impact of this virus. That means shifting away from travel bans, quarantining individuals, isolation, and moving towards preparing our health care systems to be able to deal with the surge of patients they may have, increasing vaccine development, increasing anti-viral clinical trials, scaling up diagnostic tests, and improving public health communications. That’s really what we need to be doing."
He also states the following:
"I think we are in the beginning stages of a pandemic. I think this pandemic will be mild, maybe around the scale of the 2009 H1N1 pandemic. It will likely not cause the virus to completely disappear from the world. I think it will become something that may become seasonal until we have a vaccine and we may deal with this corona virus in future winter respiratory virus seasons."
He basically confirms what I state above, as testing becomes more widespread, we will see a surge of new coronavirus cases all over the world, including the US. However, he also thinks the pandemic will be mild. Hopefully, he's right on that front.

Also, on Saturday, Dr. Anthony Fauci said he wasn't being muzzled and explained "it was a misunderstanding" at a coronavirus press conference led by President Trump which I embedded below.

The CDC had "erroneously identified the patient as a female" in a briefing with President Trump and Vice President Pence. Washington state and King County officials said the patient was a man during a news conference hosted by the CDC:
The person who died was a man in his 50s who had underlying health conditions, and there was no evidence he contracted the virus through travel, health officials said.
Unfortunately, there will be some deaths linked to this disease so it's best to prepare, especially if you have an underlying health condition.

On Sunday, former FDA commissioner Dr. Scott Gottlieb appeared on Face the Nation and stated this:
“There was an analysis out today by Trevor Bradford, very good researcher out of the Hutch, looking at the genetic strains in Washington state. And by looking at the strains and the drift between the different strains for the people who have been diagnosed there, he's suggested that there's perhaps hundreds and maybe low thousands of cases. It's an interesting analysis. There probably are more cases. We have community spread now in Washington state, California, perhaps Illinois or Oregon. So certainly hundreds of cases.”
Dr. Gottlieb also stated this which is worth noting:
“A lot of people are asymptomatic or mildly symptomatic, but they shed virus and they're still infected. They can still transfer the virus and a small percentage get very sick. And so, it's probably the 80 percent that are mildly symptomatic or even asymptomatic that are the ones that are spreading it. The other thing is that people who get very sick, don't get very sick right away. The time to hospitalization in- in different studies was nine to 12 days. So they start off with cold-like symptoms and then they progressively get more ill. And it's in that phase that people are spreading it. There was a very interesting analysis in the New England Journal of Medicine about two weeks ago that looked at viral load and viral shedding across a spectrum of disease. And the people who are mildly symptomatic shed as much virus as the people who are very sick and that's atypical. Typically, the amount of virus you have and shed to- in- in some diseases comports with how much- how much of virus you have.”
Asymptomatic shedding presents a real challenge to health authorities and if indeed viral shedding is just as bad in asymptomatic phase, then we understand why this novel coronavirus is the next full-blown pandemic which we have all feared.

Lastly, CBS News spoke to one of the top experts on viruses, Marc Lipsitch from Harvard University, who cautions that 40-70% of the world's population will become infected — and from that number, 1% of people who get symptoms from COVID-19, the disease caused by the coronavirus, could die.

Lipsitch stated this: "This is not an existential threat. This is, qualitatively, it's very much like a bad pandemic of influenza, which we experienced arguably twice or three times in the 20th Century. It's worse than the one that we experienced in 2009. But none of those brought civilization close to its knees. They made things awful for a while."

Update 2: On Monday, stocks snapped back led by technology shares (XLK) like Apple (AAPL):

It's too early to tell if this sets the stage for a major comeback but some think the market decline was driven by a panic narrative and that the silent spread of coronavirus might actually be a good thing.

On Tuesday, the Fed cut rates by half a percentage point to combat the coronavirus slowdown and stocks sold off hard. More importantly for pensions, the 10-year Treasury yield fell below 1% after the Fed slashed rates:

As I keep telling my readers, pensions are all about managing assets AND liabilities. The record plunge in US long bond yields doesn't portend well for US and global pensions as liabilities explode up while assets crater.