The stock market crash of the past two weeks looks like an over-reaction to COVID-19.
Is COVID-19 really the reason for the crash? I can’t find any other news that would explain the timing and which stocks were hit hardest.
Here’s a sample of some of the harder hit stocks, all travel-related (Friday’s close compared to the highest close in February):
- -37% Hertz (HTZ)
- -36% Avis (CAR)
- -29% World Fuel Services Corp (INT)
- -24% Carnival (cruise line) (CCL)
- -22% Delta Air Lines (DAL)
- (compare to the S&P 500: -12.4%)
It is, of course, possible that the market was in a mild bubble in early February, and the virus merely triggered a return to sanity. There were enough high-priced stocks that I’ll guess that’s explains a little of what happened. Hertz and Avis are maybe high-risk stocks due to the risks associated with the upcoming transition to robocars. But the others that I listed did not at all fit my stereotype of overpriced stocks.
And the stocks that I had been thinking were overpriced, in industries that don’t look to be especially hurt by the virus, declined roughly in line with the market.
Outside of travel-related stocks, it mostly looks like a general shift in preferences to more cash, and away from stock. I.e. a general increase in risk aversion.
The gold market is confused as to which direction a pandemic should move it. I agree. I’m confused as to how gold should react.
What scenario could explain the decline? Maybe a two month shutdown of 90+% of U.S. air travel? A multi-year reduction in travel of 10%? It would take something like that for the market reaction to make much sense. Yet I’d bet at roughly 10:1 odds against any one of those scenarios happening.
Metaculus is currently predicting 195k COVID-19 deaths this year.
Metaculus forecast trends ought to look a good deal like random walks, yet the charts I see there look more like exponential growth.
Metaculus is likely to be a more objective source of information than the
news media storyteller industry or social media. But it’s likely more susceptible to selection effects and hype than are markets that have lots of money at stake. (Metaculus has token prizes, structured in a way that may encourage more extreme bets than a regular market would).
None of this implies much about where other reactions to the virus are sensible. There’s a much different asymmetry between getting sick versus being paranoid than there is between losing money due to a pandemic versus losing money due to selling on a false alarm.
I’ve got about a month’s supply of food, but that’s my normal preparation for a variety of disasters. I have no special insights about whether the current risks justify staying home.
P.S. Chinese stocks are supporting the view that the situation in China has improved over the past month.