El-Erian Warns Investors “This Is Different”

The Dow (-0.80%) is down 300 points. The S&P (-0.90%) and Nasdaq Composite (-1.40%) have fallen as well. The 10-year Treasury yield dropped to a record low of 1.32%.

In other words, the “coronavirus dip” is finally here.

Pre-market trading this morning indicated a small recovery at the open. Instead, stocks plunged even further, driven down by intensified outbreak fears. Investors are starting to realize that the disease, which has frozen the world’s second-largest economy (China), could have a profound effect on first-quarter earnings.

Especially now that it’s spreading internationally.

Many analysts believe, however, that the coronavirus won’t keep stocks down for long. The market’s absorbed plenty of “shock” events in the past, only to recover shortly thereafter.

Allianz chief economic advisor Mohamed El-Erian, in an interview with CNBC this morning, argued that investors still need to be careful, though.

“I stress, this is different,” the economist said.

“I would continue to resist, as hard as it is, to simply buy the dip.”

El-Erian explained that while the market has a great track record of rallying after near-historic descents – like yesterday’s 1,000-point Dow collapse – it could be a while before equities are ready to recover.

“We’re going to have a lot of risk-aversion on the part of economic actors. It’s going to take time,” he said.

“Economic sudden stops are hard to restart.”

Back on February 3rd, El-Erian issued a similar warning. He told investors that the coronavirus would “paralyze China,” and “cascade through the global economy.”

Thus far, he’s been absolutely right. $1.7 trillion in global stock market values was erased during yesterday’s decline.

Based on today’s trading session, that number is set to grow.

Jeffries analyst Simon Powell expects the market to slip further as the week goes on, urged lower by an outbreak in the United States.

“We increasingly find it hard to believe that USA cases are as low as reported, and believe that given the flow of Chinese, Korean and Iranian nationals into North America, a large USA community-based outbreak is increasingly likely,” Powell said in a note.

“Imagine trying to quarantine a large city in the USA for a month, similar to how the Chinese have shut down Wuhan, or the way the Italians are trying to ring-fence 10 towns near Milan,” he added.

“Our working hypothesis is that it wouldn’t work, and could cause panic on a scale that would spook markets.”

Worse yet, Powell believes that the White House won’t sacrifice productivity to prevent the coronavirus from reaching U.S. population centers.

“Our base case hypothesis is that a Trump government is unlikely to choose reduced economic activity, and supply chain disruption, so spread of the virus, if it were to emerge in the US, would be more likely,” he wrote.

It seems unlikely that President Trump would make such a move, especially given the long-term ramifications of a U.S. coronavirus epidemic. But Powell’s comments highlight one of the biggest issues surrounding the coronavirus outbreak:

Uncertainty over what comes next.

The last flu-like outbreak in the U.S. occurred back in 1918 when the “Spanish flu” killed roughly 675,000 Americans and an estimated 20 million to 50 million people worldwide.

There’s no modern “playbook” on how to stop the coronavirus from spreading in the United States. In other first-world countries, like Italy and South Korea, containment efforts are failing.

So, as tempting as it may be to “buy the dip,” it might not be the best idea to do so quite yet. Too little is known about the outbreak’s true reach to make any investment decisions based on current headlines or statistics.

For that reason, standing aside is likely the best course of action until health officials have better control over the situation.

Provided, of course, that the number of international confirmed cases doesn’t spike in the meantime.


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