Coronavirus and Fed/Bond Backstop

The market is now paying attention with a bunch of coronavirus infections coming out of nowhere in Italy.  The markets pay attention when things hit Europe.  Asia is still a minor player in global finance, just look at the ES and ZN overnight volume during a Globex session, with Asia being quiet and Europe being much more active. 

It is now abundantly clear that the number of coronavirus cases in China are being vastly underreported, probably by a factor of 10, so it wouldn't be shocking that 1 million Chinese are infected, as this virus seems quite contagious, even more than the flu.  In the worst case scenario, which is a global pandemic, you will have a monster central bank response which would contain the downside to 15-20% lower from here.  That is still a big move down, but not a deep bear market like 2000-2002 or 2007-2009 type of move lower. 

These quantum moves, stair step down are symptoms of an overly complacent market that has been ignoring earnings fundamentals and has just squeezed higher on momentum and a select few group of loved stocks, ironically, both high growth (tech), and highly defensive (utilities).  Historically over the last 30 years, you have not had a big move down in 10 year yields leading a big move down in stocks.  You have had a plenty of times when big moves up in 10 year yields led a big move down in stocks (1987, 1990, 2000, 2007, 2011, 2015, 2018). 

That doesn't mean you can't have a 5-7% pullback in stocks while bond yields are trending lower and lower, like May/August 2019, or October/December 2014, January 2015.  It just would be nearly unprecedented for the bond market to be so strong ahead of a waterfall decline of greater than 10%. 

It makes me less bearish here despite the complacency among US stock investors and the speculative fever in some of these growth names like TSLA and SPCE.  The Fed backstop is a huge factor in containing stock market downside, and the coronavirus is a convenient excuse for central banks to lower rates and expand QE programs.  With US rates still well above zero, there is still a fair amount of monetary ammunition that the Fed can deploy on a bigger panic due to the coronavirus.  The bond market is obviously sniffing this out and running ahead of the Fed in building up rate cut expectations, which the Fed almost always has to meet, and if they don't, another Dec 2018 like tantrum will happen.  And Powell doesn't want to deal with that again. 

Expecting SPX 3200 to be a support zone where it is probably worth a small BTFD play in SPX.