It’s quite amazing that the day after Jim Cramer asked where the sellers were the market has a mini crash. S&P 500 fell 1.23% from peak to trough in 50 minutes on Thursday morning. That confused traders who didn’t see it coming. After the market gapped down, traders bought the dip so the market only closed down 0.38%.
That decline pushed the CNN fear and greed index down 4 points to 49 which is neutral. S&P 500 is still up 4.41% year to date. Biggest negative catalyst I see in the next few months is Bernie winning the Democratic nomination.
A Tale of 2 Charts: Coronavirus Winds Down
The 2 charts below are dramatically different. They are polar opposites. First shows the huge rally in the Shanghai Composite index after its big fall in its first day of trading after the new year celebration ended. Shanghai Composite is up 10.32% since February 3rd. It’s only down 1% since January 22nd which is near when the virus was first discovered.
Despite China’s rally, the emerging markets index hasn’t done well. It’s up 2.25% since February 3rd and down 4.16% since January 22nd. In other words, China is outperforming emerging markets despite having its economy halted for a few weeks.
Growth rate of deaths and new cases is falling, but economic growth is only slowly recovering. As you can see from the chart below, there have been about zero visitors to Hong Kong recently. South Korea has become one of the worst impacted places outside of China as there were 52 new cases which brought the total to 156. China reported 118 new deaths which brought the total to 2,236. There were 889 new cases which brought the total to 75,465. Good news is over 2,000 people were cured and discharged.
Morgan Stanley has 3 scenarios as to the impact on China’s GDP growth. If the impact of the virus peaks in February and March with a quick recovery outside of Hubei, there will be 5.3% Q1 GDP growth and 5.9% yearly growth. If it peaks in that time with a gradual recovery outside of Hubei then Q1 growth will be 4.2% and 2020 growth will be 5.7%. That’s the most likely scenario.
Finally, if the virus peaks in April and there is disruption into March, then Q1 growth will be only 3.5% and 2020 growth will be 5.6%. I can’t imagine it peaking in April since there were less than 1,000 new cases on the 20th. It will likely slow to a trickle in the next month. That’s why the Shanghai Composite has been exploding.
Perma bears seem to be near capitulation, but the rest of the market is acting normally. It’s surprising to see such normal levels of bulls and bears with stocks doing so well in the past 14 months. There are only 2.6% more bulls than average and 1.8% fewer bears than average. There’s no cause for concern here.
If you listen to the perma bears, they say the Fed’s balance sheet is causing stocks to rise. However, as you can see from the chart below, the stock market and the balance sheet have a negative correlation since 2014.
Whenever the perma bears show the chart on the left, which is the U.S. equity market cap divided by U.S. nominal GDP, they like to say firms are more international than ever before. Counterpoint is the chart on the right which shows the world equity market cap divided by global GDP is also elevated.
It’s about 60% lower than the U.S. ratio though. There is no doubt stocks are modestly expensive. S&P 500’s 19 forward PE means there is little opportunity for gains in the rest of the year. Many investors would like to see a pullback before buying.
Bloomberg’s Stock Drops
It’s clear that Bloomberg had a poor showing at the Wednesday debate which was his first opportunity on the stage. He made a bad first impression. That’s important because many view him as the most likely Democrat to be chosen if no candidate wins the majority of delegates. Bernie will likely get the majority, but it’s not clear yet. Because of Bloomberg’s poor performance, Sanders now has a 56% chance to win the nomination and Bloomberg has a 20% chance.
None of the polls reflect the impact of this debate yet. That doesn’t matter when looking at the Nevada and South Carolina races since Bloomberg won’t be in them. Nevada votes on February 22nd. Latest Nevada caucus poll shows Sanders with a 13 point lead.
However, polls are often wrong in Nevada because people work at different times in Las Vegas which is the state’s largest city. Warren will come in 2nd because of her strong debate. But 75,000 people have already voted, so it’s tough to tell if she will gain an edge from the debate.
If Sanders wins Nevada, he might get some momentum in South Carolina where Biden is up by 3.7% in the average of recent polls. If Biden doesn’t come at least in 2nd in Nevada, he might lose South Carolina to Bernie. Because South Carolina votes on the 29th, there will be another debate on Tuesday. Let’s see if Bloomberg can do well and redeem himself before Super Tuesday.
The stock market plummeted early on Thursday. Some of the high-flying stocks fell. Tesla stock fell 4.3% in 25 minutes. Stocks are in for more volatility in the spring, but not because of the coronavirus. That’s mostly passed. Declines might come from Bernie winning the Democratic primary.
There is currently a 20% chance Bernie wins the presidency. That’s not priced in at all. If Bernie winning will cause stocks to fall 20%, then the expected value formula implies stocks should fall 4% now. They are still near their record high though.
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