Systemic risk? Or simply a global slowdown that has yet to be priced into the stock market? I am betting it is the latter, plain and simple, even as the stock market didn't react that way.
I am also thinking that the slowdown risk isn't yet discounted enough if China does a total shutdown of their economy by keeping people away from work or staying at home, so they can't make anything in a manufacturing economy and they can't go out and spend to the way the government would like to them to.
But before we get there, let's take systemic risk off the table.
Influenza is a terrible disease. Did you know that 15 million people have caught the flu so far this season just in the United States alone? Do you know that 140,000 people have been hospitalized? Or, did you know that 8,200 people have already died? China did its best to hide the SARS illness, which, while not as infectious, was certainly more lethal than the coronavirus. The covert pictures of hospital scenes are horrendous, but they can be so in our country, too. I wonder even if the Chinese are being overly cautious to the point where the lockdowns of 18 cities could be counterproductive. Can you bring the medicine in that they need? Would it be better to screen more intensively. Not only that, but the Chinese have shared the gene sequencing of those stricken with the rest of the world. I have been following the data through Lancet.
Put it all together and you can imagine that there will be a vaccine that can be created or medicines given that could slow this darned thing down.
I do think that the possibility of all of us wearing masks and gloves when we are in the public places may be far-fetched, but even if that happens, there will be repercussions and troubles, but we will get through it. I regard this as nowhere near the hazard of Ebola, although even in the epicenter of that illness we had Dr. Mark Bristow then of Randgold, talking about doing business and simply declining to shake hands. Here, you get some Purell, you carry some Clorox (CLX) Wipes, you can wear a mask, but more important is that you keep your arms to your sides and don't touch your face. If you haven't, get the current flu shot, if only to be able to find out if you have the coronavirus and not the regular flu.
You can see that a lot of commerce will be slowed down -- more on that in a moment -- but nothing will be ground to a halt the way that systemic risk would grind it to a halt. To refresh, we had systemic risk in this country from 2007 to 2009, when a combination of ridiculously poor lending combined with abstruse instruments that bet on that lending brought down a host of gigantic banks and almost brought down the entire lending system.
I know that if a huge percentage of people in the country come down with the flu -- say ten times the 15 million that already have -- there will be a fraction of the spending we have right now. But that won't cause any company of considerable size to be threatened and credit should remain available provided that the Treasury Department and the Fed recognize the risks of a temporary cessation in work and spend.
With that preamble, let's do the kind of security analysis you have to do if you are going to try to navigate this moment.
First, there are the stocks that are in the midst of the blast zone and aren't worth speculating on, because you have no idea how well or poorly they are doing. I would include all Chinese stocks in this category. I can see buying Alibaba (BABA) if it went much lower because that's how people will shop, but they have to have the money to spend.
Second, there are the derivative stocks that rely on Chinese spending for their growth. Those include Starbucks (SBUX) , Apple (AAPL) , Nike (NKE) , Nvidia (NVDA) and YumChina (YUMC) . All of these deserve some sort of haircut and that's what they are getting. I think that each one is now worth waiting for, because they are on the verge of reporting and unless they can reassure that spending is going to continue on the same trajectory -- something that I think will be difficult to do -- you are going to get a better chance to buy. There's also the gambling companies, Wynn (WYNN) and Las Vegas Sands (LVS) : Numbers have to come down so hard that they aren't worth buying, even if you think that there's a vaccine on the horizon.
Then there are the travel stocks. These went down about 25% during the SARS epidemic 17 years ago. I think you have to use that as a benchmark and you shouldn't touch them until they do. Given that every sector trades like an exchange-traded fund, because there are so many of them, you can't try to pick one and ride it.
Next? The companies that will be hurt by a worldwide slowdown. That's many manufacturers like Caterpillar (CAT) who rely on China for business. I would say Boeing (BA) , but that's already so convoluted, who can tell. Also, 3M (MMM) reports Tuesday, and I don't know how they can forecast China. Same with United Technologies.
A worldwide slowdown plus innate fear of what's going to happen mean the buying of treasuries. That means lower interest rates. Lower rates mean lower earnings for the banks -- hence why they have been coming down and probably keep coming down. Fintech companies that rely on volume could be cut, but I am not as concerned about those. You would need a lockdown like they have in China to shutdown retail -- although I can see some just staying home and ordering from Amazon (AMZN) .
The commodities, the minerals? Oh, this just one more reason to sell. Stay away.
What's left? We are back to the domestic stocks, housing, food, drugs including biotech, and social media. Home entertainment: Netflix (NFLX) , Comcast (CMCSA) , Disney (DIS) -- yes, Disney, China is not as important as the rest of the franchises. They do work.
Now, because I am taking off the table the systemic risk, it is a matter of price for all of these. You can't be too eager about anything, but now you know the pecking order of what's worst to best given the possibility of several weeks of a selloff. I know that this seems trite, but I continue to come back to this week two years ago, when we had a hot employment number and then a bizarre Volatility Index (VIX.X) unwind that few saw coming. I can't be more hopeful than this, simply because it's been ages since we have had a big selloff and like two years ago, few seem ready for it.
