almost 4 years ago • 2 mins
After initially shrugging off the coronavirus outbreak, investors woke up to the potential for pandemic and ditched riskier assets this week – sending stocks to a resounding two-day slide on Monday and Tuesday. As everyone asks what’s next, here’s a wrap of the latest opinions.
Among the optimists is Invesco, who point out that, “it would be rare, if not unprecedented, for an infectious disease outbreak to lead to a global economic recession.”
The money manager also flags the historically relaxed financial conditions – a measure of how free people and businesses are to spend, based on interest rates, currency movements, stock market valuations, and credit spreads.
Private bank Coutts agrees that you should avoid panicking. “This is not the first health crisis that financial markets have endured,” it wrote on Tuesday. “Investors shouldn’t overreact to the often distressing news headlines.”
Indeed, the stock market slide, particularly in the US, “has a whiff of panic about it,” research firm TS Lombard said on a conference call on Wednesday. “There is upside as well as downside. We don’t think the market is excessively overpriced at this point.”
Whenever there’s a sell off, market bears will get more attention.
Here comes Nouriel Roubini with his prediction in a Financial Times column that, “despite this week’s big sell-off in equity markets, the worst is yet to come.” 😨
While the Federal Reserve will probably trim interest rates to support the economy and markets, they’re already so low there’s only scope for 1.5 percentage points of cuts, Roubini reckons.
“Expect a temporary positive market reaction when central banks signal an accommodative response to the global pandemic. But this reaction will fizzle out when the virus becomes more severe and the economic impact spreads globally.”
Others point to the yields on different durations of US government bonds – known as the Treasury yield curve – for warning signs. Richard Bernstein Advisors flags how flat this curve is now (in red) compared with when the bull market began in March 2009 (in green).
“History strongly suggests it is imprudent to get more bullish when the yield curve is flat or inverted.” RBA wrote. “Rather, the curve has been a reliable signal to gradually calm down.”
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