With the coronavirus epidemic poised to weigh on global economic growth in the weeks and months to come, it’s time for investors to dust off their market psychology handbook. Any tips and tricks learned through the years will be very helpful as incoming economic data worldwide likely disappoints and calls into question risk appetite.
“In the short-term, there are two things holding this market up. One, expectations of a dovish Fed. And it’s the expectation of a global economic rebound. If either one of those come into doubt, the market is going to correct pretty hard. I would imagine at least 5% to 10%. So those are the two variables everyone needs to watch,” Sevens Report Research founder Tom Essaye said on Yahoo Finance’s The First Trade.
There is no reason to argue whether the Jerome Powell led Federal Reserve will step back from the dovishness exuded for much of 2019 (and which helped to spur the rally in risk assets). Powell reiterated that willingness to perhaps assist the market — should economic data weaken at the hands of the coronavirus — with another rate cut in remarks on Capitol Hill Tuesday.
“The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market, and inflation returning to the Committee's symmetric 2% objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate,” Powell said in a prepared statement ahead of semi-annual testimony to lawmakers.
Said Evercore ISI strategist Krisha Guha on Powell’s comments, “The remarks support the belief that the virus developments reinforce low-for-longer on rates with some increased possibility of rate further cuts – a belief that has helped support risky assets through the virus shock to date.”
So it’s unlikely investors have to worry about a less friendly Powell serving as a market disruptor.
Shrugging off the coronavirus
But what they should probably begin wondering, to Essaye’s point, is whether the coronavirus badly hurts economic growth way more than the market currently thinks.
Remember, the market has largely shrugged off coronavirus fears — the S&P 500 and Nasdaq Composite rallying to fresh highs today. That could be precisely the wrong move as companies from McDonald’s to Apple to Tesla see their first quarter financials hit at the hands of China’s economic standstill. By extension of that, macroeconomic data across the globe could shock investors to the downside later this month and into March.
In turn, stocks would have to be re-priced for a new reality — one completely counter to the rebounding growth narrative that fueled markets into 2020.
“Given how this virus is progressing…and given how the ‘other markets’ are reacting…and given the starting point of the stock market when this virus breakout began…we believe that equity investors should be a lot more cautious than they have been so far over the past few weeks,” said Miller Tabak strategist Matt Maley.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.