Capital Wave Forecast: Without the Coronavirus, Stocks Could Keep Rising – But It’s Here and This Is How to Prepare

4 | By Shah Gilani

Markets aren’t sick by any measure…right?

They’re stronger than they’ve ever been if you look at record highs being made last week and the money flows into stocks and bonds.

It’s all good…right?

NO, it’s not all good.

This Capital Wave Forecast is your first warning. Markets are overly optimistic, have risen too far too fast, and are prone to a correction in the coming weeks.

This is exactly what could happen. But more importantly, this is what you need to do to prepare.

It’s all about the coronavirus.

Without the Covid-19 coronavirus, stocks could keep on rising.

But it’s here.

And, despite Chinese authorities saying the rate of infection slowed last week (which encouraged global markets), the number of infected people in China increased and the death toll rose to 1,665 as of Friday.

The truth is there was no slowdown; it now looks like more Chinese propaganda.

Globally, stocks rose again last week. The European STOXX 600, for example, set a new high-water mark.

In the U.S., the Dow Jones Industrials, after making new all-time highs last week, ended the five trading days up 1.6%. The S&P 500, which notched all-time highs, too, ended the week up 1.6%. And the bull-leading Nasdaq Composite, of course also making all-time highs last week, ended the period up 2.2%.

Bonds, almost across the board, across all maturities and credit-quality tranches, rallied too.

The rising tide for stocks and bonds isn’t principally based on fundamentals anymore.

It’s All Based on Money Flows

Fixed-income bond funds, including mutual funds and ETFs, saw $23.6 billion of inflows last week, according to data tracker EPFR. At the current rate, since the beginning of 2020, bond funds could pull in $1 trillion this year.

Equity mutual funds and ETFs saw inflows of $12.5 billion last week, another solid week, based on EPFR data.

If investors keep pouring money – tens of billions of dollars each week – into markets, those markets are going to keep rising. That’s about as fundamental as it gets.

But markets can’t keep rising if the Covid-19 epidemic isn’t contained…and quick.

What markets are doing now is looking past the virus’s spread, its infection rate, its death rate, and anticipating it will be under control any day or within a couple of weeks.

And markets will keep on rising as talk turns to how much manufacturing and production has to occur to make up for inventory drawdowns, crimped supply chains, and 700 million people in China on some kind of lockdown.

The reawakening of global trade and global economies, from ramping up like they’re coming out of a recession – with no overhang or impediments – to growing gangbusters is what markets are anticipating.

What’s crazy is that’s not happening.

Sure, Chinese authorities wanted factories to open last week and announced they could open, would be open for business, that things were going to get back to normal, based on their declaration that the infection rate had slowed.

Even if the virus was under control in terms of infection rates (which it is not), there’s still no cure. According to one Harvard researcher, a vaccine might be a year away.

The virus’s toll on economic numbers is frightening.

You’ll read all about them in Friday’s Wall Street Insights and Indictments column.

The short version here is that things aren’t good, and markets are looking past scary numbers and have priced too much optimism into equities.

As earnings season winds down, the focus will shift to the global impact of Covid-19.

That’s a problem.

It’s time to tighten up your belts, make sure you have profit-taking plans in place and start to think about how you’re going to trade a potential 5% to 10% correction, that could get a lot worse if the human and economic tolls from Covid-19 isn’t stopped and reversed.

Leave me a comment below about what your plan is; my team and I will read each one and I’ll try to talk about the main ones in Friday’s column. You’ll hear from me then.



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4 Responses to Capital Wave Forecast: Without the Coronavirus, Stocks Could Keep Rising – But It’s Here and This Is How to Prepare

  1. Linda Weekes says:

    My strategy is to wait till the S&P 500 hits its 200 day simple moving average. When it dips below for 2 days I de-risk taking profits from the quality stocks I don’t sell completely, and selling the higher beta stocks that do not have a dividend. I usually sell the index ETFs at this time as well. I am currently in 55% stocks and 5% REITs 15% gold and 10%cash and ST bonds and 15% in a private REIT. So I move to a 15% cash and10% ST bonds going to 40% stocks approximately. I just “tilt” the portfolio not market time then buy when the trend changes upward. I can get see-sawed but that’s ok

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