Coronavirus Vs. 2008 Financial Crisis

All the US indices plummeted in trading today as an oil price war commences, and the coronavirus outbreak creates what the markets are seeing as an “impending” economic fallout. Oil dived over 25% today amid a price war being waged by the Saudi’s on Russia, with crude futures falling to their lowest level since the beginning of 2016. All the major indices plummeted over 7% right out of the gates triggering a 15-minute trading halt on the exchanges. The US 10 Year Treasury yield fell below 0.5% in intraday, its lowest level in history, as investors flock to this “safe haven” to avoid further losses.

The US financial markets are in panic mode, but is this panic warranted? The fear index, the VIX, has spiked to its highest level since the 2008 recession as the market’s uncertainty hits a high. The spread of the coronavirus is undoubtedly going to continue, but will this lead to an economic downturn?

The Coronavirus Vs. 2008 Financial Crisis?

Right now, the impact of the coronavirus is merely causing a short-term earnings recession due to the disrupted supply chains and hampered global demand. Balance sheets, on the other hand, remain healthy and quite liquid. This is very different from the 2008 crisis, where the backbone of US finance, the banks, had toxic balance sheets and couldn’t provide proper liquidity.

The issue with the coronavirus crisis is that the markets have never dealt with anything quite like it before. They have no way to model for expected outcomes, and once the models begin to lose their integrity, funds & institutional investors panic.

The Federal Reserve has cut rates by 50 basis points so far this month, and the markets are pricing in another unprecedented 100 basis point cut for next week’s meeting. This cut would push the Fed Funds rate to 0-25 basis points, and leave the FOMC with no more bullets for any other economic emergency.

These rate cuts will provide a massive upside for companies (that aren’t banks) once this coronavirus is controlled—allowing companies to borrow money at a discounted rate. This virus’s timeline is the biggest unknown right now. How long will it last, and how many more people will be affected?

China has proved that this virus can be contained through draconian measures, as the country’s new cases have appeared to level off. The country shutdowns cities, which caused the supply shock to the world economy that has shuddered the global financial markets. More international border blocks will likely be the next steps and will further inhibit worldwide supply and demand.

Trump and his administration’s laissez faire attitude toward the coronavirus has been another significant cause of market anxiety. Trump is trying to brush this issue under the rug, saying that it is not much more than a cold. Once the infection’s spread becomes dire, Trump will scramble and take substantial measures to preserve the economy and the stock market. Once the government starts panicking, the financial markets will begin to relax, and a V-shaped recovery will follow.

What I am Doing

Now is the time to be very vigilant with your money, buying up your favorite stocks a little at a time and averaging down your price, for robust long-term investment strategy.

I like blue-chip cloud players like Microsoft MSFT, Adobe ADBE, and Alibaba BABA, which I have begun averaging down on.

I am also buying up some 3.5 month calls in the Nasdaq-100 index tracker QQQ and S&P 500 tracker SPY. My strategy is to either sell out on a bump in premium this week or hold out for a broader stock market recovery.

Take Away

We are in uncharted financial water. There are no other comparable scenarios that the markets can use as a benchmark, and models are no longer reliable. It is unclear what the full impact of the coronavirus will have on the world and its economy.

I, for one, am buying the dip, but only in small portions. I wouldn’t put on any significant positions in this time of excessive volatility until more is uncovered about the economic implications of this pathogen.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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