The worst week since 2008
What a bloodbath. US stocks lost over $3 trillion in market value in the worst week the stock market has seen since 2008 (aka the Global Financial Crisis). The phenomenon wasn’t just felt for US stocks – commodities, currencies, and global stock markets all tumbled this week. The damage collectively is sickening.
What happened? The coronavirus. I think I referred to it as corona lite virus at one point and I want to confirm that was a joke, it’s not actually related to the beer – apparently searches for “corona beer virus” and “beer coronavirus” have become quite widespread (**insert face palm emoji**). And to some extent Bernie Sanders leading the Democratic race. If Sanders gets voted into office, I might as well quit my job and get $300k in loans and become a collector of degrees, having a job will just become useless. Here’s how the week unfolded:
Over the weekend: People started fearing the possibility of a global pandemic as confirmed cases of coronavirus started surging outside of China – mainly in South Korea and Italy.
Monday: Markets globally reacted to the news over the weekend while the Cboe Volatility Index, which is a great measure for fear in the market – jumped up 46%. Confirmed cases increased to over 800 cases in South Korea and over 130 cases in Italy.
Tuesday: The CDC warned of a possible outbreak of the coronavirus in the US. Analyst expectations for earnings this quarter got revised down from a 2.5% increase to a 0.1% decrease due to coronavirus impacts being announced by many major companies.US government bonds, largely considered to be a safe haven when investors are fleeing risk, saw a massive surge in demand and yields dropped to record lows (as bond yields go down, bond prices go up). Confirmed cases increased to over 900 in South Korea (+13%) and over 200 in Italy (+54%). Iran also confirmed at least 12 deaths. In these two days, the S&P 500 lost $1.7 trillion in value.
Wednesday: Confirmed cases spiked to 1,146 in South Korea (+27%) and 325 in Italy (+63%) while China reported an additional 406 new cases and 52 deaths. The first reported case of unknown origin (aka this person contracted the virus without having traveled to one of the countries with known outbreaks) was reported in California. Trump meanwhile took to the podium to assuage fears and confirmed the government was ready to spend as needed in response.
Thursday: Confirmed cases increased to over 1.7k in South Korea (+48%) and over 600 in Italy (+85%). Note the growth rate of new cases is increasing every day.
Friday: Five more countries reported cases of coronavirus (which is now present on every continent except Antarctica) and the WHO raised the coronavirus threat assessment to “very high” risk at a global level. As markets continued in freefall, Fed Chairman Jerome Powell made a much-needed statement and confirmed the Fed would use the tools at their disposal to support the economy. The market sell-off abated slightly but stocks still closed lower on Friday. Separately, the Trump administration was reported to be considering tax cuts to make up for the economic impact of the coronavirus on US companies.
Moral of the story: The negative headlines continue piling up over the weekend and I’d expect continued pressure as markets open on Monday.
Two economic updates this week in the middle of this madness. First, the January consumer spending came in slightly below expectations but still increased at a stable rate. The Fed’s preferred inflation gauge, the PCE Index, increased to 1.7%, closer to the Fed’s 2% inflation target. Second, consumer confidence hit a six-month high in February but this data was from two weeks ago before the coronavirus outbreaks spread outside China to South Korea, Italy, and Iran.
Moral of the story: This data is unfortunately stale and doesn’t account for any impact from US consumers seeing their 401ks getting absolutely whacked this week. So, I’d take all this data with large grains of salt and expect less optimistic readings in the coming months. The higher inflation, however, does provide the Fed some room to cut interest rates if needed.