These risks to the market could end the longest bull market in U.S. history. Here’s what you need to know.
Investors have been swept up in fears about the rapidly-spreading coronavirus, but according to economist Nouriel Roubini, the deadly virus is just one of several “white swans” circling the global economy.
Roubini, who has been nicknamed “Dr. Doom,” says there are other issues that could be just as destabilizing to the market as the virus outbreak, including geopolitical tumult across at least four fronts, a potentially chaotic and contentious presidential election in the U.S., reignited trade tensions between the U.S. and China, potentially catastrophic damage due to climate chance, and a growing potential for cyber warfare.
According to Roubini, any of these white swans “could trigger severe economic, financial, political, and geopolitical disturbances unlike anything since the 2008 crisis.”
“This list is hardly exhaustive, but it points to what one can reasonably expect for 2020,” Roubini wrote in an essay for Project Syndicate. “Financial markets, meanwhile, remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets.”
Markets have been anything but calm and blissful this week, with the S&P 500 and Nasdaq both down -6% so far this week, and the Dow down -7% since Monday.
But Roubini says all of the white swan risks are within the market’s line of sight, setting them apart from unpredictable black swan events.
In addition to the risks surrounding the coronavirus outbreak, Roubini believes a war between the U.S. and Iran is “likely this year,” and said that the cold trade war between the U.S. and China could escalate “to a near hot one” this year. The economist also sees “costly environmental disasters” caused by climate change, as well as the potential that China could dump its U.S. Treasury holdings amid heightened trade tensions.
While Roubini’s white swans list represents the worst-case scenario fo what could end the longest bull market in U.S. history, investors don’t appear to be that fearful even amid this week’s sell-off.
According to a DataTrek Research survey of 294 mostly buy- and sell-side analysts, there’s concern in the market about COVID-19 – but not panic. Furthermore, only 1 in 4 expect a recession induced by the virus outbreak, though roughly a third expressed concern for public safety.
“That’s an important market observation, because investors concerned about their personal health are more likely to have bearish assessments of its macro effects,” DataTrek co-founder Nicholas Colas wrote. “The combination of personal safety concerns about COVID-19 and uncertainty about potential hear-term positive catalysts like Chinese containment likely means a continuation of [last] Friday’s volatility and further near-term declines for US/global equities.”
The sell-off in stocks since Monday has inspired fear over how much the coronavirus outbreak could spread in a market that has seen the S&P 500 reach its highest value in nearly 18 years just last week.
“There is room for further correction, there’s no doubt about that,” said Jim Paulsen, chief investment strategist at The Leuthold Group. “But I still think the fundamentals under this are pretty good. We’re improving. My guess is that we will be higher before this year’s out. I think this is a temporary correction.”
Amid this correction, however, there’s really no where for investors to run. That’s according to Oppenheimer chief investment strategist and market bull John Stoltzfus.
“The defensive [areas] that one would run to for shelter look very richly valued – whether it’s the 10-year Treasury, the 30-year Treasury, an ounce of gold, utilities stocks, real estate stocks,” Stoltzfus said. “It really depends upon news flow at this point as well as emotions. How many are lining up to sell.”
However, Stoltzfus still reiterated his long-term bullish case for the market and encouraged investors to build a most wanted list.
“Build shopping lists of what you may have missed and regretted missing just a few weeks ago when the market was moving up every day,” the strategist said. “Then, consider the price you want to buy at and that you feel comfortable with and consider how much fluctuation you can take because this will take a while to work out.”
“We think the opportunities lie in technology, industrials, financials and in consumer discretionary – all of which to some extent are going to come under pressure on days like this,” Stoltzfus added. “The markets just have to get this out of their system and then we can like move forward on fundamentals.”