Plummeting another 2,013.78 points today, the Dow Jones Industrial Average has now lost 5,700 points from its Feb. 12 record high of 29.551.42, a 19.2% drop, putting the stock market into correction territory. Before the coronavirus struck U.S. and global financial markets, 51-year-old Allianz SE chief economist Mohamed El Erian warned investors to be cautious, sensing a correction was on the way. El Erian said the rapid run up in equities was not sustainable, warning investors that inflated share prices were bound to come down. Well Covid-19 was certainly the excuse markets needed to start the waves of short selling that have netted the nation’s biggest hedge and private equity funds over $200 billion since the sell off began last week. Investors easily fall prey to the temptation to dollar-cost-averaging, a concept that tells investors to load up on stocks at bargain prices.
El Erian warned investors to wait-and-see before swooping up shares, not knowing whether financial markets have bottomed out. El Erian thinks that until there’s more guidance the course of the cornoavirus, its’ too early for average investors to jump back in. With Covid-19, the active flu from the virus, hitting 114,422 cases worldwide with 4,027 deaths, there’s nothing yet to indicate that the rate of infections has leveled off or slowed down to the point that Wall Street’s gets the guidance needed to stop short selling and start long-term value buying. Tomorrow’s expected rebound says nothing about what’s happening with the coronavirus and how it affects the economy. Value investors hope to dollar-cost-average, buying some shares only to watch more short selling dominate the market. When short sellers step back in, the expected buying frenzy will fizzle out causing the “dead-cat-bounce.”
When 66-year-old Chinese President Xi Jinping visited Wuhan today, the epicenter of the coronaviurs, the message to Wall Street was that China’s got the epidemic under control. With 19 new cases totaling 80,764 and with 3,136 deaths, there’s little evidence from epidemiologists that the epidemic is slowing down. When Italian Prime Minister Giuseppe Conte announced today that he was quarantining all of Italy’s 60 million people, world markets took notice. Italy currently has 9,142 active cases of Covid-19 with 463 deaths, something inexplicable because there hasn’t had a mass influx of infected Chinese tourists. If the SARS CoV-2 virus has that kind of contagiousness, the current situation in the U.S. could deteriorate rapidly. U.S. officials from the Centers of Disease Control announced four new cases, bringing the total to 747 with 27 deaths, a minute fraction of the 340 million U.S. population.
Tomorrow’s expected upward move in U.S. equities should remind investors that even in the most bearish markets, Wall Street’s traders find a way to make money. Hedge and private equity traders shorting markets have already raked in over $200 billion. There’s zero guarantees to long term investors that the shorts won’t dominate Wall Street, even after a sizable dead-cat-bounce. “Threat of a pandemic [had] become very real,” said World Health Organization [WHO] Director-General Tedros Adhanom,
with the coronavirus tally hitting 109,000 worldwide, with 3,800 deaths. When Wall Street traders buy back shares tomorrow, it’s going to hit them at some point that Italy has quarantined its entire country. Unless WHO says that the epidemic has leveled off, there no guidance for Wall Street to do anything other than continue the waves of short-selling to lock in profits.
Federal Reserve President Jerome Powell expects to convene his Open Market Committee [FOMC] March 17, hinting at another 50 basis points cut. When Powell slashed 50 basis points off the Federal Funds Rate, dropping the benchmark lending rate to commercial banks at 1.25% March 2, it signaled the Fed was worried about recession in 2020. Now that Powell’s considering another 50 basis points cut, it indicates that fallout from the coronavirus has plunged the U.S.—and world—economy over the cliff. Trying to quell Wall Street’s fears, 73-year-old President Donald Trump has practically stood on his head to get Wall Street to quiet down. Wall Street’s panic selling has more to do with the uncertainty of where things are going. If you listen to WHO, there’s zero reason for markets to celebrate tomorrow except for pure profit-taking, knowing that Covid-19 continues to wreak havoc on world markets.
Whatever dead-cat-bounce happens tomorrow, investors would be well-advised to heed the advice to El Erian that before jumping back in wait until there’s more guidance from WHO and Bethesda, Md.-based Centers for Disease Control [CDC]. While there’s nothing wrong with investors dollar-cost-averaging, investors shouldn’t be surprised when markets sell off again, taking markets even lower. When the dust settled after the 2008 Financial Crisis, the Dow Jones Industrial Average had dropped from $14,253.77 Oct. 7, 2007 to a record low of $6,469.95 Oct. 9, 2009, a whopping 55% drop. There’s no reasons for investors to think that today’s close of $23,851.02 or 19% below its Feb. 12 record high of 29,551.42 is a real bottom. Unless there’s clear guidance from WHO or the CDC, investors should sit on the sidelines before swooping up bargain stocks. No one knows where Wall Street is going.
