We saw an headline this morning that read, “Futures unchanged over concerns about the coronavirus.” CONCERNS…WHAT CONCERNS??? The stock market is at all-time highs. How can anybody say that stock investors are “concerned” about the coronavirus when they have taken the stock market back up to record highs???
It would be one thing if the stock market was coming off of an historic three year decline…that had left the stock market oversold and undervalued…like it did when the SARS outbreak took place. However, the coronavirus is coming after a huge 3-year rally (actually, a 10-year rally) that has left the stock market overvalued on an historical basis. (No, it’s not at a record level of overvaluation, but its valuation is still quite extended on an historical basis.)…….In other words, the stock market is showing ZERO signs of concerns over the coronavirus, so that headline was way off the mark.
If we look at the other global markets, the complacency that resides in the stock market becomes even more evident. The 10-year Treasury yield has fallen back below 1.6%...the dollar sits at it highest level of the year…and gold stands withing 1% of its seven year high! Therefore, given how these “flight to safety” markets have been acting, it’s safe to say that investors in other markets are A LOT more concerned about this healthcare crisis than the U.S. stock market is at this point.
We have heard many stock market pundits try to tell us that the coronavirus will be a short-lived phenomenon and thus won’t have any important effects on the global economy. These people have no idea what they’re talking about. That does not mean they might turn out to be correct. (Let’s face it, there were people who don’t know anything about football who correctly in predicted that the Chiefs would win the Super Bowl, but that doesn’t mean they knew what they were talking about.) However, since they have no idea what they are talking about, nobody should listen to them…at least when it comes to this health issue. (We don’t know how it will come out either…and that is why we have avoided predicting what its intermediate or long-term impact might be.)
However, when you listen to the healthcare and scientific experts…who DO know what they’re talking about…they are a lot more concerned (and their concerns seem to be growing). No, they are not saying that the coronavirus will turn into a major global medical disaster. Thus we are not saying that stock investors should run for the hills. However, 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. It’s just makes common sense in our minds.
Investors need to stop worrying about FOMO (the fear of missing out)…and look at what some of the other markets are doing right now. It just makes sense to us for investors to be willing to miss on a little bit of upside in the stock market at this point…because it’s not going to run away from them up at these levels like it did in 2019 (AFTER a deep 20% correction in late 2018).
What we’re saying is that the downside risks in the stock market are much bigger than the upside risks right now…after the HUGE 42% rally we’ve experienced over the past 13-14 months. In other words, if the coronavirus turns out to be a non-event, the upside potential for the stock market up at these levels is going to be relatively small. If, however, the virus turns out to be a much bigger problem, the downside potential will be quite substantial. Therefore, equity investors should be more cautious than they are right now in our opinion. IT’S JUST COMMON SENSE.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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