The outbreak of COVID-19 has bludgeoned risk assets and sent those perceived as havens — gold and government bonds, for example — to new heights. And the landscape that has emerged since the emergence of the coronavirus-borne disease late last year in Wuhan, China, is increasingly uncertain.
That dynamic has left many investors, traders, analysts and strategists to question whether the timing is right to buy into a market that has been prone to stunning day-to-day and even intraday swings over the past month.
The Dow Jones Industrial Average
is down 12.3% since its Feb. 12 record high, a decline that meets the widely accepted definition for a correction. The technology-heavy Nasdaq Composite
and the broad-based S&P 500
are both in correction territory, off 12.5% and 12.2%, respectively, from their recent peaks, by that same standard. Another risk asset, crude oil
has plunged nearly 35% from its recent settlement peak, on Jan. 6.
Meanwhile, the 10-year Treasury note
has been at the head of a global rally in debt prices that has sent yields, which move in the opposite direction to prices, to historic lows. Demand for the perceived safety of bonds pushed the benchmark 10-year note to an all-time low at 0.684% on Friday, according to FactSet data. Safe-haven gold
has been surging, making its largest one-week upward move since October 2011.
Against that backdrop, investors are asking themselves whether the time is ripe to scoop up assets that might be viewed by some as attractively discounted, would it be wiser to continue to pile into safe plays, given deep concerns about the economic impact of the viral epidemic on global supply chains, and changes in behavior that could have lasting impacts on economies around the world?
Here’s how some market participants are thinking about current investment prospects.
‘I’ve been trying to drill home for weeks that there’s no exact historical playbook that comfortably fits.’
Stephen Innes, chief market strategist at AxiCorp, said it’s difficult to position for such an exogenous event upending what had been a bullish market setup. “Geopolitical risks that were characterized by potentially significant but complicated to quantify impacts on fundamentals (statistically these events usually trigger [a 6.5% decline], but short-duration impact three weeks to bottom and three weeks to recover),” he wrote in a Friday note, observing that the coronavirus shock was continuing to play out in markets.
Indeed, overall cases in the U.S. have hit 401, and 17 people have died, according to data compiled by Johns Hopkins University. Around 105,000 people worldwide have been sickened by the disease, which has claimed more than 3,550 lives across the globe.
Innes said his less optimistic scenarios would see the market put in a bottom in about six to seven weeks, with stocks likely falling 15%. In a growth-slowdown case, the market could still be 2½ months from its nadir, which would result in an overall decline for equities of between 15% and 20%.
In a worse-case outcome, the market drops 30%, and that plays out over the next half-year or longer.
“I’ve been trying to drill home for weeks,” he said, “that there’s no exact historical playbook that comfortably fits. But that there are parallels with past S&P 500 selloffs.”
Corey Hoffstein, Newfound Research LLC: “If you believe markets are a screaming buy today — more than they were last week, or even more than they were last October — you are inherently market timing. Which is fine, but should at least be recognized. A call to ‘buy the dip’ is inherently a market-timing call and should be recognized as such. If investors are going to make such a call, we believe it is important for them to consider where they believe the market is mispricing future expectations: yield, growth or risk appetite.”
‘A call to ‘buy the dip’ is inherently a market-timing call and should be recognized as such.’
B. of A. Securities strategists led by Michael Hartnett wrote on Friday that one outcome is a collapse of the bond surge that has taken hold in fixed-income markets. The “clearest outcome of exogenous COVID-19 is collapse in bond yields, which once panic fades can induce huge rotation to ‘growth stocks’ and ‘bond proxies’; in equities, e.g., FAANG stocks, software, REITs, mortgage REITs, utilities,” the strategists said, referring to a group comprising Facebook
and Alphabet, the parent of Google
(and thus the acronym’s “G”).
Tom Essaye, the Sevens Report: “There is no question that growth and earnings will be lower in the coming months, and while we saw some pretty significant cuts to expected S&P 500 [forecasts for 2020 earnings per share] (some as low as $150), the rational consensus is for EPS currently between [$165 and $170] for 2020. Taking the midpoint ($167.50), that means the S&P 500 is trading at [17 times estimated 2020 earnings per share], down from [a multiple of just below 20] less than two weeks ago. … [W]e think that is too pessimistic for the current situation.”
“Now,” Essaye goes on to ask, “does that mean we should rush in and buy stocks hand over fist today?” No. He cites “enormous technical and psychological damage done to the markets [that] will take time to work through — so at best we can likely expect several weeks or a few months of chop as the market finds a bottom.”
‘It is too early to bottom fish in equities.’
BCA Research: “The COVID-19 outbreak is a serious real-time exogenous threat, and our view might change as developments unfold. For now though, we believe that the fundamentals of the U.S. economy are supportive of a cyclically bullish stance. However, caution is still warranted in the near term. It is too early to bottom fish in equities.”
Jefferies Equities: “Huge drawdowns frequently represent the punch line and not the setup. But realistically, by the time the dread sets in, we are almost always already on our way back up. While there are many market prognosticators that will tell you why buying a dip might not work, and why every time is different, it is hard to argue with human nature and history. We analyzed all of the 3 standard deviation single-day and rolling (five-day) moves the S&P 500 has had since 1990. While we found that the bounces tend to be swift and robust, more importantly, performance tends to be overwhelmingly positive over a (three-month) horizon. Ex-[the financial-crisis era], three-month S&P 500 performance was positive over 90% over the time, in both 1-day and 5-day scenarios.”
‘We see little reason to assume markets have found a support level, despite the extreme levels of risk pricing and the potential for short-term bounces.’
Stuart Kaiser, UBS: “Episodes when the Cboe Volatility Index
rises above 30 are fairly rare historically and accompany an average SPX drawdown of 10% with a [decline ranging from 5% to 21%] vs. its trailing one-month high. The average rise in the VIX in those cases is 20%, but much larger moves, including today, are not unprecedented. We see little reason to assume markets have found a support level, despite the extreme levels of risk pricing and the potential for short-term bounces. In 2015 the VIX reached 40 on [Aug. 24] and did not fall below 20 for 30 trading days, with an average level of 26, VIX reached 30 on [Dec. 21, 2018] but was below 20 in 13 days, and in 2008 VIX reached 30 on [Sept. 15] and was above 20 for 331 days.”
‘We probably will see another down leg from here, but what we tend to see is, when everyone gets so bearish, that is when they miss out on opportunities.’
David Mazza, Direxion: “From a longer-term perspective, valuations across the market just got a lot more attractive. For investors [who] do not believe this will lead to a true 2008 type of global downturn, dipping your toes into the water does make some sense. This is data financial markets have a great deal of difficulty pricing in. [The COVID-19 disease] has already led to more deaths than SARS. It’s quite scary, but markets tend to overreact in the short term, and I think we are starting to see some of that. While this will be a relatively difficult period, for markets and the economy, we will continue to persevere and press ahead. Until we see U.S. consumption turn negative, that continues to position me for the long-term positive. Invest with faith. We probably will see another down leg from here, but what we tend to see is, when everyone gets so bearish, that is when they miss out on opportunities.”
‘Overall, the failure to make more of an effort off the lows is problematic, as is the rapid Decline in [the Dow Jones Transportation Average] along with Yields, the combination which has proven to have a downward Tug on prices.’
Technical analyst Mark Newton said he hasn’t seen enough conviction in recent moves in the market to be comfortable jumping in. He said declines in the Dow Jones Transportation Average
viewed by many as a gauge of the health of the domestic economy, and the persistent fall in yields as a sign that the worst isn’t past.
Newton said that he is looking for the market to defend last week’s lows to signal an appropriate entry point.