Over the past few weeks I, along with some others around here or in the investment community in general, are a bit puzzled by the market’s extremely bullish outlook despite the economic impact of nCoV virus turning out to be a lot more severe than initially expected by many.
In my original post about the virus I made some predictions, and they mostly turned out to be very accurate, from AAPL missing their quarterly result (I wrote the post 2 days before Tim Cook gave a wider than normal range for the quarter estimate and 21 days before they issued a guidance warning), to China’s energy demand dropping in the short term to the disruption to the supply chain.
On the other hand, I’m very glad that I didn’t make any impulsive trading decisions and short the market, since as everyone know the market has been only getting bullish as this whole virus saga unfolds. Even the Chinese stock market has been doing relatively well since reopening despite the whole country’s GDP going down the drain this quarter.
So is it pure market exuberance (i,e crypto market back in 2017) or is it the media who’s making a mount out of an ant hill with regard to a bad flu?
I believe it’s neither (ok some market exuberance is definitely here, I can’t complain about my TSLA holding). Because in the end, no fundamental behavior/pattern of the market is being threatened by the epidemic. If we look back at the dotcom bust of the late 90s, huge valuations for companies with unproven revenue models was the driving factor of the bubble and for 2008 it was the overly leveraged subprime mortgage market. The market didn’t collapse because the stocks were trading high, they collapsed because those unsustainable driving factors for the bubbles inevitably came to their end.
So where are we now? Yes there will be some short to medium term economic pains, especially to small/medium businesses or companies that operate in certain industries (I wouldn’t go all in on cruise ship stocks right now lol), but none of that will be the actual cause for a real recession since the current operating framework of the economy still appears to be solid. The Chinese central bank and other government feds/central banks will have no problem injecting cash and capital to keep the appearance up and it may very, very well succeed in smooth out the market bumps through the next 3 months. They have all the economic and political incentives to keep this up for as long as possible, and if the virus threat does end (or at least stops worrying people) in the next 3 months, they probably will succeed.
I see two risks with this outlook, one is the virus turns out to be worse than expected and China’s economy is still halted six months down the road. In this case the impact will cascade and surpass what the market will be willing to ignore. The second risk is the intense short term pain (supply chain disruption, terrible cashflow impact, SMB hurting, etc) will uncover some fundamental problems in our current economic model. This is slightly more likely than the first risk and it will catch everyone by surprise, so by its nature it’s difficult to predict exactly what it would be.
In the end, I’ve not changed my investment strategy since the whole virus saga began and I recommend people to not make impulsive decisions trying to time the market in the short term. Considering the unprecedented containment measure and economic impact of this epidemics, this will be a very good data point and learning lesson for everyone, doesn’t matter which side you are on.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.