Moneybeat – Wall Street’s coronavirus correction


MARY REICHARD, HOST: Coming up next: The Monday Moneybeat.

NICK EICHER, HOST: Maybe we call it the Monday Money-taking-a-beating.

You started hearing about the market plunge in just about every news report you heard or read last week: The Nasdaq off 10-1/2 percent on the week. The Standard & Poor’s 500, down 11-1/2. The Dow Jones Industrial Average almost 12-1/2 percent. That’s just in one week, and it’s almost certainly because of the coronavirus scare.

Instead of rattling off number upon number, record-setting event after record-breaking event, we got in touch with David Bahnsen. He’s a cool-headed and wise financial adviser and analyst with offices in New York and southern California. Today, he joins us from California.

Good morning, David.

DAVID BAHNSEN, GUEST: Good morning. It’s good to be with you.

EICHER: Let me begin with defining terms: When we talk about a “correction” in the stock market, we’re talking about a big index falling 10 percent from its high point. The Dow Jones Industrial Average, the Nasdaq, the Standard & Poor’s 500. The big ones. It’s rare that corrections happen quickly. We’re talking 20 to 40 to 100 trading days for a correction to materialize, this decline of 10 percent. 

That’s the definition and the context.

So in light of that, it’s notable that last week’s market correction happened in a lightning-fast six days. That’s record speed. We saw more than $3 trillion in market value wiped out.

David, I read The Wall Street Journal every day, I noticed one big article quoting you calling this a bloodbath. Let me ask you: To what extent has the market been overvalued and due for a correction and how much of this is a “non-financial, exogenous force,” meaning outside the traditional bounds of economics, purely a public-health issue?

BAHNSEN: Yeah, great question, Nick. Those aren’t two totally binary or separate items. I think that because there were certain parts of the market that were already frothy in their valuation, you get a compounding effect. This is a real story and the coronavirus thing has turned into a panic-level event and yet it certainly is made worse when things were starting at a frothy position. 

One thing I would say, by the way, you did point out and you’re correct that it was $3 trillion with a T of market cap that was evaporated in these four days from the S&P 500. But it’s $11 trillion of market cap that has evaporated from global stock markets. 

So one has to sort of ask if the coronavirus epidemic and situation that is really so far reasonably muted in its actual impact, it’s trading off of its potential impact. If those really bad potential things all come to fruition, which by the way I don’t think they will and obviously we all pray they won’t. But even if this thing really gets into some of the bad territory some are worried about, is $11 trillion enough to have covered it? In other words, what is it people think can happen that is worth more than $11 trillion of value? 

It would stand to reason that we’re now in a position where we’ve overshot on the downside and markets may not find that footing immediately. They may very well find it. But in correction territory like this, you’re at risk of a very violent snapback as well.

EICHER: It’s striking how globalized our economy is. I think we all know it. But we don’t really perceive it, until something like this coronavirus crops up. 

Can you explain, David, how at-risk we are, because we can’t wall ourselves off from the global economy?

BAHNSEN: Well, that’s right. We’re not. And the global economy can’t wall itself off from the U.S. either, so these things come together. Now, generally speaking, global conditions do not put the U.S. into a recession. The U.S. put the globe into a recession. But my point is systemically U.S. is more leader than follower here. 

So, the question is will supply chain disruptions become so severe that they do that. I think it’s very unlikely, but I’d absolutely think it’s possible. But I don’t think that that is at all related to what’s happening to the market right now. There isn’t some ability out there to kind of price what could go wrong from a health epidemic and then price how that wrongness needs to be handicapped into market prices. This is just pure, indiscriminate freefall panic selling. 

And when you defined it for listeners earlier what a correction is, you’re right. It was a sort of technical vernacular around a 10 percent drop. All of the major market indices have exceeded that in just a matter of days. But as far as the stock market’s correction goes, it’s really important to separate fundamentals from what is driving markets now and there’s no question that what’s driving markets now is indiscriminate panic.

EICHER: I noted the debate about the markets hoping for the Fed to ride to the rescue with interest-rate cuts. Just last week, I played a soundbite of the president of the Atlanta Fed bank saying he’s not hearing about an extended negative impact, that we’re looking at just a short-time hit, then back to normal. In other words, there’s no reason for the Fed to move off its current position on interest rates. 

Then Friday, Fed Chairman Jay Powell signaled he’s ready to cut interest rates if needed. Do you think the Fed should do something, or would that be attacking the wrong problem?

BAHNSEN: Yeah. It’s a difficult question to answer and I don’t want to be overly nuanced or complicate things, but I have to answer your question in the context of the role they’re playing, not the role I want them to play. But in the role I want them to play, my answer would be no. However, that’s not the world we’re in. That’s not the game we’re playing. 

So, to the degree I’m talking about the rules of the game that they have set—not that you and I have set—I do think they’re going to have to cut because they have said that they believe in what’s called the wealth effect. That it’s their job to ensure as much economic stability as possible. And so therefore I have to tell you that I think in their paradigm, there’s no question that over 4,000 points of Dow drop in four or five days meets the criteria of them taking emergency measures. The Fed Funds Futures market is pricing in a 100 percent chance that they will cut rates at the next meeting.

EICHER: Appreciate your time, but before we go: Do you think the underlying economic conditions are such that, should this thing pass, the economy will go back on a tear—or do you think we’re at the end of the big economic expansion?

BAHNSEN: I don’t know the answer to that because let’s say this whole coronavirus thing had never happened at all, it was a question before then as well. 

A lot of really good things have been done over the last few years. So, that kindling is still there. But when you have an economic shock, sometimes it’s difficult to re-light the wood, so to speak.   

But if we look to SARS, if we look to Ebola, if we look to Zika, you had a 10 to 13 percent drop in all those cases, too. Now, they didn’t happen in 4 days, so this feels more violent. But it is entirely possible that through the forces of human ingenuity and science and medial and technology and all the good things that we’re in a better position in a few weeks and have a more rational way to evaluate the economy. But it’s really hard to do right now.

EICHER: David Bahnsen is a financial adviser and analyst based in California. David, thanks for your wisdom. Great to talk with you and thanks for your time this morning.

BAHNSEN: It’s always a pleasure to be with you. Take care.


(AP Photo/Mark Lennihan, File) This Jan. 31, 2020, file photo shows a Wall Street sign in front of the New York Stock Exchange. 

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