Crash, boom, bang – stocks got hammered to start the week. Coronavirus got the blame, but is there something else possibly in play? Perhaps, Wall Street is worried about the potential of a Bernie Sanders presidency?
We’ll start with COVID 19. It’s no surprise that peak fear for the coronavirus would hit in February. It’s by far the highpoint month for the flu in the northern hemisphere. As the weather starts to warm up, the cases of the flu, including COVID 19 should drop. It may no longer be a part of the everyday conversation by tax-day.
The flu’s schedule, if you will, is no secret. It’s a well-known cycle that’s been in play for decades. It’s not going to change. The pending pause should give the medical community the opportunity to find a vaccination by the time flu season re-ignites in full by late November/early December.
Now, there are alarmists out there claiming 40%-70% of the world’s population is going to contract the virus. This number seems way over the top relative to what most experts I’ve read or heard forecast. It would be real trouble if the more aggressive predictions come to pass but, for now, we suspect it’s unlikely.
Where the virus is having an impact is on manufacturing supply chains. These disruptions should be temporary and ease in-line with the flu’s regularly scheduled, spring/summer decline. Longer-term, this scare is likely to force companies to reconsider where they locate their facilities. Some percentage is probably going to move their manufacturing to the US, which could be a delayed benefit.
If coronavirus is to blame for the current selloff, then investors might be able to breathe easier within the next few weeks. It should pass as the flu season ends and supply chains return to normal.
Bernie Sanders, on the other hand, is a different story. By Super Tuesday, March 3, the Democratic Socialist could have the Democrat Presidential Nomination essentially locked up. By his own admission, he wants to dramatically change the economic landscape of the United States. His potential election creates uncertainty. If I’ve heard it a million times, I’ve heard it a trillion times “Wall Street hates uncertainty.” That uncertainty is going to last until at least Tuesday, November 3, 2020 should the Bern continue to pile up delegates.
There is a school of thought that the Vermont Senator can’t win the general election. Baloney! Remember, Hillary Clinton was the 90%, odds on favorite to win in 2016. How did that turn out?
For the time being, investors have to deal with uncertainty on top of uncertainty, the coronavirus and what a President Bernie Sanders means to the US economy. With past as our prologue, both concerns are almost certainly overblown.
In the meantime, the week’s early drop of more than 1,000 points broke all sorts of trendlines for the three major indexes. We are in uh-oh country. The respective 200-day averages are the initial worst-case scenarios. That would put the Dow around 27,250, the S&P 500 at 3,050 and the NASDAQ in the neighborhood of 8,900.
Cliff diving indexes also rearranged our market models. As to be expected, our momentum model turned negative, as did our leadership model. Our longer-term, market type model remains bullish, barely, and could flip to neutral with another bad day or two.
What should investors do?
Number one, don’t panic. Even Warren Buffet says not to trade the coronavirus headlines. If you feel like you want to move some cash to the sidelines, then we suggest matching up some losses to winners to mitigate taxes.
Second, start lining up stocks you’d like to own once the fear trade has passed. Car stocks, tech companies that build a lot of their products in China, like Apple (AAPL), cruise line stocks, YUM China Holdings (YUMC), NIKE (NKE), and airline stocks to name a few.
Third, you can add an exchange traded fund that goes up when the market goes down. Something like ProShares Short QQQ (PSQ). The ETF is designed to return the opposite of the NASDAQ 100 on a daily basis. For example, if the NASDAQ 100 drops 1% on the day, PSQ is expected to rise 1%, not including fees and expense. It’s important to remember that inverse ETFs tend to be short-term holdings as the market’s natural inclination is to go up.
This downward volatility will pass and open up opportunities for investors to buy good companies at better prices. While earnings for some companies will likely suffer, the impact should be felt in the current quarter while rebounding in the subsequent two to three quarters.
We’ll keep you updated as things progress.
May all your trades be profitable!