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The Coronavirus Toll Continues to Climb

Forecast risks are overwhelmingly on the downside and depend crucially on how governments respond,

Source: Leo Kolivakis

Fred Imbert and Pippa Stevens of CNBC report the Dow tumbles 900 points to end Wall Street’s worst week since 2008:

Stocks attempted to rally on Friday, but failed, concluding one of the most volatile weeks on Wall Street ever as investors grapple with mounting fears over the coronavirus’ economic blow.

The Dow Jones Industrial Average closed 913.21 points lower, or more than 4%, at 19,173.98 after rallying more than 400 points earlier in the day. The S&P 500 slid 4.4% to 2,304.92. The Nasdaq Composite closed 3.8% lower at 6,879.52 after jumping more than 2%.

Sources told CNBC that Ronin Capital, a clearing firm at the CME Group, was unable to meet its capital requirements. The news weighed on stocks in the final two hours of trading because it was yet another sign of the pressure being put on some firms amid the sharp downturn in markets.

Among the other factors weighing down the market once again Friday afternoon were a stay-at-home order for New York State, a swift reversal in crude prices and a strengthening dollar. The rollover in oil, which has lost half its value in a month, is having a ripple effect, leading investors to sell assets in other markets. Oil gave back a strong gain to settle sharply lower.

“The markets are trading more on emotion than the actual data,” said Sal Bruno, chief investment officer at IndexIQ. “That’s what’s causing the volatility.”

“We’ve seen assets just trade off, really for no good reason, but just because there’s fear,” he said. “When we look back at this, we’ll see how much of this was information-based trading and how much was emotionally based trading.”

Shares of 3M dragged the Dow lower, falling more than 9% along with Disney. The S&P 500 tech sector rolled over to close more than 4% lower as Microsoft fell 3.8%. Qualcomm, meanwhile, slid 6.3%.

The Dow dropped more than 17% for the week, its biggest one-week fall since October 2008, when it slid 18.2%. The S&P 500 lost more than 13% week to date after dropping another 11.5% last week. The Nasdaq fell 12.6%. Both the S&P 500 and Nasdaq also had their worst weekly performances since the financial crisis in 2008. The 30-stock Dow is now 35.2% below its all-time high level from February, while the S&P 500 is 32.1% below its high.

Investors got whiplash this week amid the massive daily swings in both directions. The S&P 500 concluded on Thursday a record streak of eight trading days with a closing change of at least 4%. The Cboe Volatility Index (VIX), Wall Street’s preferred fear gauge, closed above 80 earlier in the week, topping its financial crisis peak.

“The volatility, there’s no reason to think it dissipates,” said JJ Kinahan, chief market strategist at TD Ameritrade. “What you really want to see is the market establishing some trading ranges.”

“Right now, I don’t think anyone can say there’s definite support or resistance because the moves have been just so big,” he said.

On Wednesday, the Dow closed below 20,000 for the first time since February 2017. Investors were hoping that was the bottom and that the stock market can recover as virus cases peak in the coming months and government stimulus kicks in.

The Federal Reserve announced this week a number of stimulus measures in addition to Congress’ efforts. The U.S. central bank announced Friday it is expanding its asset purchase program to include municipal bonds. These measures, however, haven’t assuaged investors’ fears.

“Market volatility will persist until the government — fiscal or monetary — provides a backstop to stressed corporates and small & medium businesses,” New York Life Investments’ Lauren Goodwin said Thursday. “Support of those functions is vital to ensuring the economic disruption of covid-19, though severe, is temporary.”

Late Thursday, California Gov. Gavin Newson announced a statewide order for sheltering in place. “Home isolation is not my preferred choice … but it is a necessary one. … This is not a permanent state, this is a moment in time,” he said.

In New York on Friday, Gov. Andrew Cuomo ordered 100% of nonessential businesses to work from home. “When I talk about the most drastic action we can take, this is the most drastic action we can take,” he told reporters.

More than 14,000 cases of COVID-19 have been confirmed in the U.S. along with over 200 deaths, according to Johns Hopkins University. Globally, more than 245,000 cases have been confirmed.

As the coronavirus spread Thursday, Bridgewater’s Ray Dalio said the outbreak will cost U.S. corporations up to $4 trillion, and “a lot of people are going to be broke.”

“What’s happening has not happened in our lifetime before. … What we have is a crisis,” the Bridgewater founder said on CNBC’s “Squawk Box.” “There will also be individuals who have very big losses. … There’s a need for the government to spend more money, a lot more money.”

Alright, it’s Friday, another crazy week where everyone is glued to their television set watching the latest news on COVID-19.

Before I begin, I think it’s really important to cover critical news on COVID-19:

Importantly, a friend of mine who is an expert epidemiologist sent me the latest CDC study, Severe Outcomes Among Patients with Coronavirus Disease 2019 (COVID-19) — United States, February 12–March 16, 2020, and I bring to your attention its summary:


What is already known about this topic?

Early data from China suggest that a majority of coronavirus disease 2019 (COVID-19) deaths have occurred among adults aged ?60 years and among persons with serious underlying health conditions.

What is added by this report?

This first preliminary description of outcomes among patients with COVID-19 in the United States indicates that fatality was highest in persons aged ?85, ranging from 10% to 27%, followed by 3% to 11% among persons aged 65–84 years, 1% to 3% among persons aged 55-64 years, less than 1% among persons aged 19-54 years, and no fatalities among persons aged 19 years or less.

What are the implications for public health practice?

COVID-19 can result in severe disease, including hospitalization, admission to an intensive care unit, and death, especially among older adults. Everyone can take actions, such as social distancing, to help slow the spread of COVID-19 and protect older adults from severe illness.

Now, my friend added this:

“This report is quite revealing although it is incomplete as it does not have information on the reasons for why subjects were hospitalized. It could be that a majority of these younger patients are being hospitalized out of precaution because of a history of (mild) asthma.”

He’s careful not to overreact to this report and thinks the CDC wants to “knock some sense” into young adults partying it up during spring break and not heeding advice to practice social distancing.

I retweeted this today just to show you that young adults are vulnerable to serious illness:

Every young person who thinks he or she is invincible should read the entire thread he posted. Even if it’s anecdotal evidence, you don’t want to end up a statistic.

Another friend of mine sent me this article where Nobel laureate and Stanford professor Michael Levitt explains how coronavirus is slowing and humanity will survive:

I bring to your attention this part of the article:

Levitt compared the situation to bank interest—if on the first day a person receives an interest rate of 30% on their savings, the next day of 29%, and so forth, “you understand that eventually, you will not earn very much.”

The messages his friends translated quickly made waves in China and people wanting to make sure he did indeed write the information attributed to him started contacting Levitt. “That is how I knew I needed to continue,” he said. “I could have said, yes, that’s what I said,’ and left it at that.”

New numbers were being reported every day by various entities, such as the World Health Organization (WHO). Levitt started sending regular reports to his Chinese friends, and their popularity led to interviews on Chinese television, for example on CNN-equivalent CGTN. Based on the diminishing number of infection cases and deaths, he said, the virus will probably disappear from China by the end of March.

Initially, Levitt said, every coronavirus patient in China infected on average 2.2 people a day—spelling exponential growth that can only lead to disaster. “But then it started dropping, and the number of new daily infections is now close to zero.” He compared it to interest rates again: “even if the interest rate keeps dropping, you still make money. The sum you invested does not lessen, it just grows more slowly. When discussing diseases, it frightens people a lot because they keep hearing about new cases every day. But the fact that the infection rate is slowing down means the end of the pandemic is near.”

There are several reasons for this, according to Levitt. “In exponential growth models, you assume that new people can be infected every day, because you keep meeting new people. But, if you consider your own social circle, you basically meet the same people every day. You can meet new people on public transportation, for example; but even on the bus, after some time most passengers will either be infected or immune.”

Another reason the infection rate has slowed has to do with the physical distance guidelines. “You don’t hug every person you meet on the street now, and you’ll avoid meeting face to face with someone that has a cold, like we did,” Levitt said. “The more you adhere, the more you can keep infection in check. So, under these circumstances, a carrier will only infect 1.5 people every three days and the rate will keep going down.”

Quarantine makes a difference, according to Levitt, but there are other factors at work. “We know China was under almost complete quarantine, people only left home to do crucial shopping and avoided contact with others. In Wuhan, which had the highest number of infection cases in the Hubei province, everyone had a chance of getting infected, but only 3% caught it,” he explained. “Even on the Diamond Princess (the virus-stricken cruise ship), the infection rate did not top 20%.” Based on these statistics, Levitt said, he concluded that many people are just naturally immune to the virus.

The explosion of cases in Italy is worrying, Levitt said, but he estimates it is a result of a higher percentage of elderly people than in China, France, or Spain. “Furthermore, Italian culture is very warm, and Italians have a very rich social life. For these reasons, it is important to keep people apart and prevent sick people from coming into contact with healthy people.”

China did great work and managed to gain complete control of the virus, Levitt said. “Currently, I am most worried about the U.S. It must isolate as many people as possible to buy time for preparations. Otherwise, it can end up in a situation where 20,000 infected people will descend on the nearest hospital at the same time and the healthcare system will collapse.”

Now, professor Levitt was trying to reassure his fellow Israelis and it remains to be seen if he turns out to be right, but even he stresses the importance of social distancing to slow the propagation of the virus.

There’s another problem with this coronavirus pandemic, we are making decisions without reliable data:

“The data collected so far on how many people are infected and how the epidemic is evolving are utterly unreliable. Given the limited testing to date, some deaths and probably the vast majority of infections due to SARS-CoV-2 are being missed. We don’t know if we are failing to capture infections by a factor of three or 300. Three months after the outbreak emerged, most countries, including the U.S., lack the ability to test a large number of people and no countries have reliable data on the prevalence of the virus in a representative random sample of the general population.”

No doubt, there’s a lot we don’t know about COVID-19. How many people have been infected and are immune to it? How many people are asymptomatic but are infected? Will there be a second and third wave before we develop a vaccine or proven treatments? Etc.

At this point, all this doesn’t matter because we know enough about the disease to state the following:

  • It’s highly transmissible and new research shows asymptomatic/ mildly symptomatic people are a high risk group for community spread.
  • It is far more deadly to older people, especially in the US, and young people are most certainly not immune to it.
  • Drastic measures are upending the way we live (nobody wants to feel like they are under house arrest) but if we all collectively adhere to these rules, we will mitigate the damage and hopefully avoid the nightmare scenario which is unfolding in Italy.

What else do we know? We know this pandemic and the drastic measures being implemented to address it will throw the US and global economy into a severe recession:

Nonetheless, I caution you, forecast risks are overwhelmingly on the downside and depend crucially on how governments respond, a point underscored by many experts:

Still, we know Q2 GDP will get clobbered and whether it’s down 14% (JP Morgan) or 24% (Goldman) is irrelevant, we know people are losing their jobs at an unprecedented rate and unemployment will skyrocket in the near term to levels we haven’t seen in decades:

This is why it’s imperative to get money to people losing their jobs as soon as possible, something which politicians are working on.

I must say, I am a little shocked that there isn’t a way to avoid sending people checks and not doing direct deposits immediately to their bank account. It shows how ill-prepared we are as a society to deal with a pandemic of this nature, not to mention all the other things which have hampered the efforts of healthcare workers (when this is over, the entire world needs to do a major COVID-19 postmortem!!).

Why am I stressing this point? Because while the focus is on bailing out big companies, many Americans with less than $1000 to their name are going to go hungry if they don’t get some sort of assistance fast.

Ian Shepherdson is right, the deflationary shock now underway is gigantic and unless policymakers address it with the right policies, they risk aggravating an already terrible situation, a point underscored by Daniel Lacalle in his latest comment:

Now, as far as markets are concerned, I already warned you to prepare for a miserable March, the great coronavirus unwinding is still underway and it looks like the crash of 2020 is going to be another one for the history books.

This week, I spoke about the Ackman bottom warning my readers to ignore gurus on television peddling positive or negative news and to look at markets in a cold, objective way.

With this in mind, here is a snapshot of today’s market action:

After a brutal week, let me first start with some good news:

  • The Wednesday lows on the Dow (18,917) and S&P 500 (2,280) held today.
  • Tech stocks continue to hold above critical levels and have not declined as much as the overall market.
  • The VIX index which gauges market fear fell from a high of 85 on Wednesday to 65 on Friday despite the continued selloff while small caps have outperformed large caps over last few sessions. This tells me the panic selling might be done, for now, and the market is trying to find an interim bottom (I stress interim NOT ultimate).

Now, the bad news:

  • The Russell 2000 is close to taking out its February 2016 low, which isn’t surprising given small cap stocks have been obliterated and will bear the brunt of the economic fallout from this pandemic.
  • The S&P 500 is close to taking out its low from December 2018 and the Nasdaq made a new low today. In fact, after popping in the morning, tech stocks ended down 3.8% on Friday.
  • More funds/ brokers will deleverage and there are other shoes to drop in the weeks ahead.
  • Share buybacks are being heavily curtailed or outright stopped.
  • In 2008, the VIX peaked (October 2008) well before the market ultimately bottomed (March 2009), so don’t read too much into the recent decline in volatility, it means traders and investors are prepared for the coming onslaught of bad news ahead.
  • High yield spreads continue to blow up as oil prices cratered this week. High-yield default rates are likely to rise to 10% over the next 12 months because of the coronavirus crisis, according to S&P Global Ratings.
  • Mutual funds and exchange traded funds that invest in bonds suffered $109 billion in outflows for the week ending Wednesday, a new record that also included the highest-ever weekly outflows for specialist junk bond and investment-grade corporate bond funds.

Bearing this in mind, here are some long-term weekly charts I am looking at very closely:

Again, it’s bad and will likely get worse as markets digest the onslaught of bad news but it’s actually not a total disaster as tech stocks continue to hold above critical bear market levels (for now).

Nonetheless, year-to-date, the S&P 500 is down 29% and all sectors are down considerably, especially cyclical sectors like Energy, Financials, Industrials and Materials:

It’s also worth noting the backup in long bond yields this week, exacerbated by investors trying to meet margin calls, rocked safe sectors like Real Estate and Utilities:

REITs have other issues to contend with as this pandemic unfolds, deflation isn’t bullish for real estate as unemployment skyrockets and people stop spending on non essential items.

By the way, that goes for every sector and every company but it’s clear some industries will experience much harder times than others.

The S&P 500 earnings yield now stands at a 50-year high versus the 10-year Treasury yield but I warn you earnings are set to crater:

Still, it’s important to note stock prices move ahead of earnings revisions, something Denise Chrishom underscored in a post I saw on LinkedIn earlier today:

She is absolutely right, market losses always precede big downward earnings revisions, so don’t base your investment decisions based on earnings.

Having said this, one hedge fund manager warns the market purging could lead to a plunge of 74%:

But before you go slicing your wrists, take a deep breath, relax, focus on the long run, and ignore all these gurus spreading positive or negative news in the media.

Right now, focus on your mental and physical health, stay informed, stay active and make sure you take care of your loved ones. The market is not the most important thing in the world. You and the health and well-being of your loved ones are, so maintain perspective and be a good citizen as we deal with this pandemic collectively.

Anyway, take care, stay safe, I’ll try to cover pensions and markets as best as possible during this difficult time but I won’t be doing so on a daily basis so please bear with me.

Below, Bridgewater founder and co-chairman Ray Dalio said the US corporations will lose as much as $4 trillion due to the economic damage from the coronavirus outbreak.

Second, Guggenheim’s Scott Minerd talks with CNBC’s Brian Sullivan explaining why he’s buying bonds and thinks stocks have further to fall.

Third, the Dow drops more than 900 points. A look at the reasons why with CNBC’s Brian Sullivan and Fast Money traders Guy Adami and Tim Seymour.

Fourth, Liz Ann Sonders, Charles Schwab Chief Investment Strategist, joins “Closing Bell” to the impact of the coronavirus on markets.

Fifth, Gary Cohn, Former National Economic Council director, joins “Closing Bell” to talk about the government’s response to the coronavirus outbreak.

Lastly, Italian hospitals are at their absolute limit, with hundreds more deaths reported daily, and huge challenges in caring for those infected. UK’s Channel 4 News and Sky News take an inside look at the front lines, but I warn you, these clips contain very disturbing scenes of the sickest patients (the virus is taking a higher toll on men).

I simply marvel at these Italian healthcare workers and all healthcare workers around the world treating direly sick patients who have succumbed to COVID-19. They’re incredible in every imaginable way.

Let’s all do our part to support them. Listen to your government officials, practice social distancing, stay home as much as possible, wash your hands and disinfect your surfaces and don’t touch your face.

Hopefully, this nightmare will be over soon but for the foreseeable future, we are all responsible for taking care of ourselves, our loved ones and one another.


Equities Contributor: Leo Kolivakis

Source: Equities News