Wuhan Coronavirus Paradox

They say that its not the news that's important for a stock, its the stock's reaction to the news.  Similarly, its not the news that's important to the stock market, its the global central banks' reaction to the news that's important.  And the market is making the high probability bet that this coronavirus scare will make the central banks more dovish even with stock indexes in the US near 52 week highs. 

Reduction in consumer spending due to the Wuhan coronavirus will be short term and temporary, eventually leading to a bounce back of stronger consumer spending in the future.  But any easing that central banks do in the short term will last way beyond any short term economic weakness, providing a lasting boost to the stock market.  When the Fed cuts rates due to a short term economic hit, they don't raise rates when the economy recovers.  They usually wait many many months and even a few years before they normalize rates back to where they were before the short term economic downturn. 

Just like the flu and SARS, the virus is at its peak when people's immune system is at its weakest, during the winter.  So when the weather gets warmer, beginning around April and May, the number of new cases will probably go back down.  And that's all it will take for people to believe that the worst is over, and then it will be back to business as usual. 

As bad economic news is good news for the stock market in recent years, this will also make yields go lower, which delays the big stock market crash, because as I've mentioned many times before, a big selloff in the bond market is usually what is needed before you get a big selloff in the stock market.  The coronavirus will delay the bond market selloff. 

So the top for this stock market will have to wait, and even though it seems like Bernie Sanders has a very strong shot at winning the Democratic nomination, the market is distracted by this latest topic so it probably won't focus on the 2020 election at least for another month when the primary season gets much busier. 

Short term, the market is still vulnerable because of the parabolic nature of the rally, but with the way the bond market is trading, going up relentlessly, I just don't see a sustained selloff here, perhaps it could get down to as low as 3200 if traders really panic, but that will be quickly bought up and the uptrend probably continues because the Fed has your back, without a doubt now, because of this coronavirus.  Which is in an odd way, providing protection for the stock market via a easily scared Fed.