Stocks Catching Cold Or Something Worse?

You knew it was coming. No, not the Coronavirus. Rather an excuse du jour to create some selling. After an impressive joyride to the upside, which saw the S&P 500 surge +15.3% from the close of October 2, 2019, and the high seen on January 17, 2020, the stock market had become overbought, sentiment had become overly optimistic, the macro theme was well established, and lots of folks thought there was only one way the market could go from here. As in onward and upward in a fashion seen in 2013 and 2017.

In short, bullish complacency had set in.

As is usually the case when the market gets THIS overbought and sentiment becomes THIS bullish, something comes out of the woodwork to cause the fast-money crowd to rediscover their sell programs. In this case, it was the fear of the Coronavirus, the dive in oil, falling interest rates, and, of course, a new take on an old theme - the trade war.

Students of market history recall that stocks stumbled a bit 17 years ago when the severe acute respiratory syndrome (SARS) posed both a health and economic threat to the globe.

Until Friday, the U.S. stock market had basically shrugged off the reports that the Coronavirus was wreaking havoc in China. But now that there are a handful of cases here in the U.S., traders have taken notice.

Stocks Are Worried About...

From the stock market's perspective, the key concern on the Coronavirus front has to do with the potential impact on global economic growth. China's economic growth in particular. Given that the outbreak is occurring during the Lunar New Year, China's equivalent to the Christmas/Hanukkah holiday season, where Chinese traditionally travel to the town of their birth and that serious travel restrictions have been put in place, the thinking is that China's GDP is going to be impacted.

My take is that unless this thing gets scary, the U.S. consumer will likely go on about their business and the U.S. economy won't take much of a hit. The big assumption here is that a meaningful outbreak does not occur in the U.S. However if we've learned anything since the Financial Crisis, it is that John Q Public can and will stop spending at the drop of a hat if things get scary. So, if the number of cases in the U.S. doesn't explode in the next couple of weeks, the current decline in the stock market will probably be temporary. But if this thing spreads quickly, all bets are off.

Rates and Oil

Then there is the dueling problem of declining rates and oil prices. Market logic suggests both are indications that folks are indeed worried - at least in the short-term - about the economy.

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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

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