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As coronavirus jolts trading, stock pros confess ‘we don’t know what’s going on’

The Cboe Volatility Index, which measures the market’s expectation for swings up or down, remained high for six consecutive sessions.
The Cboe Volatility Index, which measures the market’s expectation for swings up or down, remained high for six consecutive sessions.
(Richard Drew / Associated Press)

Along with the virus, here’s what people said was driving the stock market last week:

Optimism over Fed policy.

Pessimism over Fed policy.

Optimism over the government’s response.

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Pessimism over the government’s response.

Joe Biden.

The ink was barely dry on one view, and the market went careening the other way. It’s a futile, and infuriating, situation for investors and analysts. Forget about trying to predict where stocks will be in six months or a year. These guys can’t even figure out where they’ll be tomorrow.

Everything depends on how the virus outbreak will play out. And nobody has a clue.

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“When you have a 4.5% up day in the market and a 2% down day — what does that mean?” says Kathryn Kaminski of AlphaSimplex Group. “It just means we don’t know what’s going on.”

The result has been historical turbulence, swings that rank with any before. The Cboe Volatility Index, or the VIX — the so-called fear gauge, which measures the market’s expectation for swings up or down — remained above 30 for seven consecutive sessions through Friday, the longest streak since 2011.

Gains on Monday turned to losses Tuesday turned to gains Wednesday turned to losses Thursday and Friday. In 10 trading sessions, three have seen the S&P 500 close up or down 4%, and four others brought 3% dives. An eight-day average of the S&P’s daily high-low range is the widest since 2011, according to Bloomberg data.

Analyst advice was all over the map, and some of the Street’s usual bromides seemed less assuring.

Buy the dip? “This time, it’s a little harder to say whether that’s the right thing to do,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Until you have better clarity on whether or not it could cause a recession or a dramatic slowdown, the likes of which the bond market is indicating, it may be a little premature.”

Cantor Fitzgerald says investors should use any rally based on central bank actions to sell equities. JPMorgan Chase & Co. says the responses will succeed: time to wade in. Bloomberg Intelligence’s Gina Martin Adams points to a spike in high-yield bond spreads — bad for shares.

Deutsche Bank Securities Inc. strategists see the sell-off continuing. In episodes when volatility increased relative to historical levels, it’s taken an average of six to seven weeks for it to subside, the strategists, led by Peter Hooper and Matthew Luzzetti, wrote in a note, with the S&P taking another four to five months to recoup losses after that. A 30% drop from recent peaks, their most severe scenario, corresponds to an average recession sell-off. As of the close of trading Friday, the S&P was off about 12% from its record high set just two weeks before.

Citigroup Inc. says it’s unwise to do anything before data catches up with the virus, including earnings revisions. “We admit that we cannot fully capture what are fluid developments,” the group led by Tobias Levkovich wrote in a note.

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A string of companies have warned of hits to profits, but few have said how big. Goldman Sachs Group Inc. and JPMorgan, among others, have cut their earnings forecasts in recent days. Cumberland Advisors, a money management firm with over $3 billion in assets, has taken down its projections three times, according to David Kotok, the firm’s chief investment officer.

“We aren’t getting guidance from companies because companies don’t know what to give,” Kotok told Bloomberg TV this week. “But we do know pain is coming on the earnings front.”

Messaging from the Fed confounds, too. After instituting an emergency interest rate cut on Tuesday, Chairman Jerome Powell left the door open to further action at its next scheduled meeting. A day later, Federal Reserve Bank of St. Louis President James Bullard said he didn’t think markets should over-emphasize the possibility of another reduction as there might be little justification for a change in rates by then.

Expectations that the global economy will bounce back quickly from the coronavirus — a so-called V-shaped recovery — are looking increasingly misplaced, Citigroup Global Markets wrote in a note to clients. The Covid-19 virus, which started in China, is now weighing on developing nations directly through supply chains and via more sluggish growth, the bank’s strategists said.

The coronavirus and measures to contain it offer a rare twin shock to supply, shuttering Chinese factories, and demand, as consumers become more hesitant to shop, travel or eat out. Outside the most at-risk nations in Asia, Israel, Russia and Chile are among the most vulnerable markets from a global slowdown standpoint, according to Citi. Pressure on governments to pay healthcare expenses could also leave areas like the Caribbean and Africa in trouble, they wrote.

One prominent investment banker even blamed the coronavirus for threatening a decade-long boom in corporate mergers and acquisitions, or M&A. “How many people have had a deal in trouble the past two weeks?” Blair Effron, co-founder of Centerview Partners, said in a presentation Thursday at Tulane University’s Corporate Law Institute conference in New Orleans. “Volatility hurts M&A; the longer it goes, the more quiet it is.”

The volume of mergers and acquisitions announced through the end of February already was down 27% to $419 billion, the slowest start to a year since 2013, according to data compiled by Bloomberg. Seven & i Holdings Co., owner of the 7-Eleven convenience store chain, scrapped plans to acquire Marathon Petroleum Corp.’s Speedway gas station business for $22 billion on Thursday, with the coronavirus outbreak among factors impacting negotiations, Bloomberg News reported.

All that uncertainty helped drive the violent day-to-day trading swings.

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“Once things get to this point, it normally takes a few weeks for things to settle down,” Michael Shaoul, chief executive officer at Marketfield Asset Management LLC, told Bloomberg TV. “All we know now is that we don’t really understand what’s going to happen next. It’s probably four, six, eight weeks before we’re going to have any useful information as to what the trajectory of the virus is or what the actual economic fallout looks like.”


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