Panic. That’s how the world’s media characterized last week’s sharp drops on financial markets as the threat from coronavirus (COVID-19) became clear.
Over $5 trillion was wiped off stock indices in five days and the S&P500 had its worst week since the Global Financial Crisis. No wonder the Fed moved to cut rates on Tuesday (3 March 2020) .
A turbulent week, no doubt about it. But is this characterization of panic (and the implication that markets acted on emotion) a fair one? If not, what does it say about where markets go next as we enter uncharted territory on COVID-19?
From tulips to blue chips
Historically, heart has ruled head when it comes to the way in which markets have reacted to black swan events. But is this still the case in our data-driven age? Just because our 17th Century forebears manically piled into tulip contracts, or in 1929 went with their gut in dumping everything, we shouldn’t assume today’s ‘corona correction’ is the triumph of emotion (i.e. fear) over hard-headed analysis.
In fact, I would argue that what happened last week was not panic at all, but a clear, news and data-driven response to a fast-shifting set of circumstances.
First, it appears to be a move by markets already looking distinctly ‘toppy’ and were looking for a trigger to correct. Surely the more irrational position was the one in which global stocks found themselves in mid-February: touching a record high even as virologists were scrabbling to define the severity, length and spread of this outbreak.
In that sense, a correction which takes the heat out markets could be a silver lining. Traders are hurting, yes, but in reality we have only retreated to levels reached last October. The bulk of the gains, made over a decade-long rally, remain intact.
Second, market participants are not suddenly dumping positions because they cannot withstand the tidal force of this correction. In large part, these falls are a considered response to the fact that coronavirus combines a threat to global demand, global supply and to global financial markets and, furthermore, that the data suggests this outbreak has a way to go yet.
To get a sense of how serious the current situation is, just look at these charts from Refinitiv’s Coronavirus App. In contrast to the steady rise of cases during the SARS outbreak of 2003, the number of COVID-19 cases is increasing far, far more rapidly and doesn’t look like tailing off.
The fact that we are all becoming amateur epidemiologists right now highlights just what a complex job market participants have in trying to price assets accurately. No longer is their job only about trading statements and yield curves, but medical research papers and mortality charts too. Not surprisingly 18 of the 20 top stories accessed on Refinitiv Eikon in the past fortnight have related to coronavirus.
I would go so far as to say the range of alternative data sources that financial markets are having to consult is without precedent and spurs me on in terms of the emphasis our firm has already placed on ‘alt data’.
From here on, the job for financial markets is to balance information around the global spread and speed of coronavirus, with data from a number of lead economic indicators. Already the global economy’s warning lights are flashing amber; measures like the Baltic Dry Index (BDI) – a proxy for global trade flows – which had already fallen 80% since September on the back of Sino-US trade tensions.
Some commentators are optimistically predicting a ‘V’ shaped recovery. Others are digging in for a long and grim 2020. My advice is to ignore both and to keep drilling the data dispassionately. I’m pleased to say that, so far during this outbreak, that’s exactly what most participants in our complex financial markets are doing.
How to track the developments:
The Corona Virus app in Eikon is your single destination to keep track on the key market moving headlines as well as the charts, data and impact analysis on the markets, sectors and commodities asset classes. If you’re an Eikon user, simply search for ‘Corona Virus’. If you’re not a user, get access now or switch to Eikon.
Listen and review the webcast recording of our client webinar with Dr. Richard Peterson, MarketPysch’s CEO and Refinitiv’s Richard Goldman Market Development Director, Quant and Feeds, who presented Refinitiv’s research and insights on the current pandemic; reviewing the impact across different sectors in APAC.
David Craig is CEO of Refinitiv