On Coronavirus and Stock Market

Published on March 4, 2020

I was reading an article from Bridgewater (hedge fund).

The odds of a person being infected by the virus may be infinitesimally low, but the odds that he/she thinks about it approach 100 percent.

How true that the disease affects everyone psychologically. Fear strikes everyone. Decision makers are forced to “do something” even if the risk is low.

Effects on the market

Then I read a memo from Howard Marks (Oaktree hedge fund).

The real process is: bad news + decline in psychology → price declines

The current market reaction can’t be relied on to reflect reason:

  • Amazon and Google declined inline – but they stood to profit more since their businesses are online!
  • People flocked to 10-year Treasury note, dropping yield to 1.1%!

Then the Fed cut rate by 50bps on Mar 3 (yesterday).

And so, Fed are now left with only 100bps to cut, until rates reach 0% – limited ammunition!

He end the memo with

no one can tell you this is the time to buy. Nobody knows.

On rate cut

Another of Howard Marks memo is on rate cut, in 2019:

When the Fed cuts interest rates, as the consensus expects it to do soon, investors take that as a “buy” signal. Their thought process is simple:

weak economy → rate cuts → economic stimulus → stronger GDP → higher corporate profits → higher stock prices

Exactly how do low rates contribute to wealth creation?

  • Reduce the cost of borrowing especially for car, home
  • Therefore has more to spend
  • Businesses reduce the cost of capital, debt payment; therefore leave them with more cash to spend
  • When interest rates go down, prices of stock/property/bond go up – because:

As interest rates rise, asset prices fall because investors can receive a higher return on a risk-free investment. Conversely, as interest rates fall, asset prices rise.

Just some random insights 🤓