A Roadmap to a Covid-19 Market Bottom

Sunday March 8, 2020

If a massive liquidity injection was the antidote to the crisis of '08, then a massive targeted response to halt the contagion of Covid-19 is the antidote we have to wait for today.  

What I expect to happen

1)  infection and deaths will continue to rise as long as its unimpeded; however it will not be unimpeded due to a reflexive response by governments and society.  

2)  as infections and deaths continue to increase, governments will respond more and more aggressively (enforcing lockdowns and quarantines, testing)

3)  as infections and deaths continue to increase, society will implement their own personal protection protocols.  (washing hands, social distancing)

4)  Both governments and society will become more and more draconian in their response until the virus is halted - and will not slow (the teal line) until it is halted.  (this appears to have happened in China)  

What does this imply?

1)  The virus is ultimately halted (at some unknown point in the future - peak of red line)

2)  In hindsight when looking back, the point of max infection panic will likely coincide with a market panic.  This also implies that infection rates would have declined ahead of this event due to the 2 week infectious incubation period - although it would not be observable in the data at the time.

3)  When the market believes that the virus can be contained, it can rally.  This would occur by observing the first large region that has determined sufficient government and social response to contain the virus (in a democratic country)

What can we expect?

1)  Watch the European country infection rates to slow before North America.  Since they are 3 weeks ahead of North America, we can expect European governments and society farther along in their reflexive response to the virus, relative to North America.  What we see in Europe, we should expect to see in North America.

2)  Expect that a point of sufficient government and personal containment protocols will occur (intersect of the red and teal times) while North America is at its max panic being 3 weeks behind.  (when North America is just beginning to put in sufficient measures to halt the virus)  

What am I watching

1)  The North American infection rates to assess where we are currently

2)  The eurozone rates to assess where North America will be in 3 weeks 

3)  The Chinese numbers to gauge the measures needed to contain the virus, as North America and Europe head towards similar measures

When to put money back to work

1)  Wait for Eurozone infection rates / acceleration to slow - which will allow markets to bottom

2)  This likely coincides with accelerating social and government responses here, to match those in the areas in Europe that have slowing rates of infections.

3)  This likely also coincides with max market panic here, as we institute these responses to peak infection risks, and represents a point in time to begin investing again.

Ultimately the market needs to see that both governments and society are mounting a sufficient response to halt the virus.  

Email me at riskmanagerjeff@gmail.com to let me know if you want updates as events unfold in this crisis.

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RiskManagerJeff

PS - the oil market is going into free-fall tonight, impacting both energy, currency and credit markets.  I believe most of the move today, is due to risks of a liquidity/credit event due to the linkage to emerging market economies with USD debt, and weakened balance sheets in US energy companies - ultimately affecting financial markets at a time when demand destruction is in full swing, and liquidity is already strained.  Yes, its that convoluted.  However, this is a man-made problem which can be walked/talked back.