Is Coronavirus an Excuse for Scared Investors to Bail on ‘Sick’ Stock Market?

The Dow Jones closed Monday over 450 points lower. That's its fifth straight day of losses and its worst intra-day performance since October.
Posted in: MarketsOpinion
Published:
January 27, 2020 11:59 PM UTC
  • The coronavirus put a pause on the Dow Jones’ dizzying ride to new record highs. But one global strategist says it’s just an excuse.
  • He says the stock market was already sick before the Wuhan virus outbreak. Now nervous investors are bailing out before it crashes.
  • If he’s right, the pullback will deepen into a panic. Then it will trigger a broad, painful, and inevitable stock market correction.

The Dow Jones’ final run up to 30,000 has been postponed. Wall Street was ecstatic as the index posted its highest ever closing record of 29,297.64 on Jan. 16. But the unexpected headwind of a coronavirus epidemic in Wuhan has unsettled the stock market.

The Dow Jones closed Monday over 450 points lower. That’s its fifth straight day of losses and its worst intra-day performance since October. The broader S&P 500 Index’s 52 point drop exactly matched the Dow’s 1.57% loss for the day. But the tech-heavy Nasdaq Composite fared worse with a 1.89% plunge of 175 points.

CNN reports “stocks tanked on coronavirus fears.” The markets managing editor at Barron’s says the “stock market is dropping because coronavirus is spreading.” But the chief economist and global strategist at Euro Pacific Capital, Peter Schiff, says the selloff is the symptom of a worse problem for stocks.

Economist: Stock Market Is “Very Sick”

“[Coronavirus] is the excuse, not the cause of the selloff.” | Source: Twitter
Schiff says assuming the U.S. stock market is healthy would be a fatal mistake.

He argues it’s the feverish stock market rally that has Wall Street feeling under the weather this week. Peter Schiff is known for his contrarian investing approach. But he’s not the only strategist blaming a fever on Wall Street instead of one in Wuhan.

Oppenheimer strategist John Stoltzfus says day traders are using the coronavirus epidemic as an opportunity to take a more “risk adverse” position.

Peter Boockvar, Bleakley Advisory’s chief investment officer, said on CNBC Monday:

Sentiment got extremely bulled up…was just all one-sided. So, that’s the backdrop for what was probably a needed rest in the market, and this just so happens to be the catalyst for it.

Joining Boockvar on the segment, David Lebovitz, global market strategist at JPMorgan Asset Management, said:

If we think about the run that we had in markets, really, over the past couple of months… I think that there was room for markets to pull back before [during the SARS epidemic]. I think, now, there’s even more room for markets to pull back.

Jeff deGraaf, chairman of Renaissance Macro Research, said in a Friday note:

Conditions in the broad market are ripe for a pause as sentiment measures and overbought conditions are at extreme levels. However, the missing ingredient to temporarily halt the advance in the market has been a catalyst.

The coronavirus was the excuse for a hasty exit from an overbought stock market.

Stocks Doomed When Wall Street Fever Breaks

Although several Wall Street analysts agree with Peter Schiff that Wall Street is more afraid of its own fever than Wuhan fevers, most don’t take his long-term bearish position. They see it as a temporary cooling down phase, a pause, a pullback.

But Allianz CEO Oliver Bate backs up Schiff’s stock market macro thesis. He told Yahoo Finance at the World Economic Forum in Davos that stocks “are overvalued,” adding:

We have to look beyond sentiment, we have to look at the underlying facts. There are a lot of risks still involved. We are still at an all-time high in terms of asset valuations, and that means eventually they will have to correct. I think we are much higher than we were in 2007.

According to the Buffett indicator, valuations relative to GDP are indisputably higher than they were in 2007, just before the Great Recession toppled the economy over.

It may be tempting for market bulls to write Schiff off as a “permabear.” But his analysis merits serious consideration. He predicted the Great Recession in a series of CNBC appearances from 2006 – 2007. What’s more, he described, in terrifyingly accurate detail, exactly where the crisis would start and how it would roll through the economy.

Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com.

Gerelyn Terzo edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: June 24, 2020 1:05 AM UTC

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W. E. Messamore @thehuli

Markets Contributor for CCN living in Nashville, Tennessee. Bachelor of Business Administration from Belmont University in 2009 (majored in Entrepreneurship). Organized Senator Rand Paul's first and second online fundraisers in 2009. Roving editor for the Independent Voter Network since 2013. Email me | Link up with me on LinkedIn | My Website | Follow Me on Twitter (followed by: fmr Rep. Ron Paul (R-TX), Sen. Rand Paul (R-KY), fmr NM Gov. Gary Johnson, and Rep. Thomas Massie (R-KY))