Coronavirus Is NOT the Reason for This Week's Sell-Off

Every major media and financial outlet has been blaming this week’s market sell-off on growing coronavirus fears.

Too bad that’s mostly BS.

Let’s take a look at some headlines from Monday:

“Dow Industrials Close 1000 Points Lower as Coronavirus Cases Mount” — Wall Street Journal

“U.S. Stocks Plunge as Coronavirus Crisis Spreads” — The New York Times

“Coronavirus Is Cratering the Stock Market. Why It Can Still Get Worse” — Barron’s

“U.S., Global Markets Plunge as Coronavirus Cases Spike Outside China” — The Washington Post

“Dow Ends More Than 1,000 Points Lower as Coronavirus Spread Sparks Fear of Global Economic Hit” — MarketWatch

“Global Stock Markets Plunge on Coronavirus Fears” — BBC

“Global Stocks Have Worst Day in Two Years as Coronavirus Fears Spread” — Financial Times

“Stocks Fall as Coronavirus Fears Hit Global Markets” — The Guardian

“Dow Jones Futures Dive As Stock Market Rally Faces Possible Coronavirus Pandemic” — Investor’s Business Daily

As I write to you now, the Dow has shed 4,153 points (14.3%) in a week. Meanwhile, the S&P 500 has lost 475 points (14.2%).

While nCov-19 certainly has the potential to disrupt markets globally, the recent spread of the virus has little to nothing to do with this week’s big sell-off. And there’s really good evidence for this. First, let’s take a look at what supposedly started this week’s sell-off…

Last Friday, health officials report there had been 75,456 confirmed infection cases, which had caused 2,236 deaths. By Monday, official reports said there were 79,441 confirmed nCov-19 cases with 2,620 deaths.

So between Friday and Monday, the number of confirmed cases has increased 5.3%, with the number of deaths increasing by 17.2% — the latter being the bigger cause for alarm.

But if these increases in confirmed cases and deaths led to a 1,000-point sell-off in the Dow on Monday, why has it been generally increasing since the beginning of the outbreak?

Between the first confirmed case on December 1, 2019 and last Friday, the Dow Jones increased 27.3%.

Even since the WHO declared the outbreak to be a Public Health Emergency of International Concern on January 30, 2020 — which was also the date of the first confirmed spread of nCov-19 between two people in the United States — the Dow increased slightly by 0.5% through last Friday.

In that same time, the number of confirmed nCov-19 cases has increased over 10-fold with the number of deaths increasing 1,215.3% through last Friday.

If a 10-fold increase in cases and a +1,200% increase in deaths didn’t cause stocks to plummet, why did a 5.3% increase in the number of cases and a 17.2% increase in the number of deaths cause a 1,000 point drop in the Dow?

Answer: It didn’t.

Now, we aren’t denying that spreading coronavirus fears contributed to the sell-off, but it’s not the main cause.

The fact is commodity and futures prices were signaling serious market concerns as early as last Tuesday. The USD, gold, and stocks were all flying high last week. Meanwhile, index futures went into backwardation.

In fact, let me share with you some private Slack messages I sent to fellow employees last Wednesday.

So what caused the market to sell-off?

Well, a number of things. But mostly the simple fact is stock markets were overbought and over-hyped. In short: A market correction was inevitable with or without coronavirus.

Trees Don’t Grow to the Sky; Neither Do Stocks.

Stephen Auth, CIO at Federated Hermes, noted on FOX News on Wednesday, “We had a 17% run without a pullback. The last 16 times we had something like that we’ve had a 10% correction… This is a correction that was well overdue. The coronavirus is a good excuse for one.”

Fact is, last week the Dow was trading 11% over it’s 200-day moving average. So, again, a market correction was inevitable with or without coronavirus.

So why is every major media and financial outlet blaming the market sell-off on spreading coronavirus fears?

Well, I can only speculate, but my best guess: Coronavirus is just the easiest scapegoat. As Auth noted, the coronavirus was a good excuse for a correction.

Mainstream financial media needed something to blame for the sell-off. The last thing they want to tell you is markets are overbought. That’s simply because mainstream financial media are permabulls with a vested interest in getting you to buy stocks.

The coronavirus was simply an easy target to blame that couldn’t argue back. Besides, it makes for good clickbait.

I believe there’s also a laziness factor at play. Very often, mainstream media just repeats what competitors say; they just regurgitate easy and popular answers.

At worst, major media and financial outlets are purposely blaming coronavirus because they estimate (as do many others) the outbreak will most likely just turn out to be another flash in the pan virus — like swine flu or bird flu. And once the rest of the world figures that out, they know they can convince you to keep pumping the market up more and more.

Don’t buy into it folks. Hype is real. And it creates bubbles that eventually bust.

So what now?

Well, with a 14% pullback in both the Dow and S&P 500, and the media just now beginning to swing to the “sell everything now” narrative, it’s probably a good time to start buying. A market correction is defined by a 10% pullback. However, of the 26 market corrections since WWII, the average correction saw a 13.7% decline. So I think it is time to start cautiously buying again.

I’ll leave you today with a quote from Canadian rapper Tory Lanez’s latest track: “When they swing that way to the right, you swing to the left, ya heard?” And he ain’t been broke in a minute.

Until next time,

Luke Burgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.