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How long will this coronavirus twilight zone last?

Peter Switzer
2 April 2020

US stocks are down for the third time in four days as we potentially confront the trickiest time of all — the next two weeks for the USA. Predictions I’ve referred to when the Yanks might see their Coronavirus stats peak and then flatten, ahead of falling, look like they’re starting to work out for Australia.

Like most people, I’m sick of this Coronavirus Twilight Zone life we’re leading. As the infection numbers come through, I wonder whether we’re too tightly locked into believing that this will go on longer than it actually will.

A recent story suggested Virgin Australia had only three months of cash left and needed a $1.4 billion loan from the Government. But on closer reading it looks like the company could have nine months of dough. This makes me think: are we expecting this terrible economic drama to go on longer than it has to?

Chris Joye’s team at Coolabah Capital Investments tipped we’d peak between April 4-11 and the US in late April. And the news is starting to look better here.

The experts are thinking that the infection rate curve is starting to flatten, though it takes time to show up. But the signs are peddling hope. And this chart gives us even more!

March 22 brought 537 cases. Seven days later, the next surge was 528. But in between, the trend line is pretty steep in the right direction — down!

And I guess if you want to actually see the so-called curve flatten, have look at this from the www.health.gov.au website:

That damn curve of new and cumulative Coronavirus cases is getting less steep — go the curve!

Unfortunately, the US isn’t getting the same good news yet but that shouldn’t surprise anyone because the experts think it could be another two weeks before we can expect the numbers to turnaround and the key curve flattens.

We’ve got a hell of a wait. And the US stock market won’t make it easy. Imagine you were a fund manager who can buy and sell stocks to make money. In the business, you’d be a hedge fund or a fund that can go long or short the market.

When you go short the market, you exploit bad news. In that kind of situation, you could be a big seller when the market falls 36% in three to four weeks, as our stock market has, but then you’d start to buy. And then there’s a small surge and you’re a buyer until you make a nice short-term profit and then you sell to book the profit in real dollars, create a reason for another sell-off until you buy again, and so on.

There would be fund managers and individual investors doing that now. They’ll ease up when the US Coronavirus numbers look like they’re close to flattening. So these guys and gals might think they have a week or so of buying, and then selling, and then buying quality companies like CSL. Even if they get the timing slightly wrong, they’re still holding a great company.

CSL

The ups and downs over a month pretty well prove my point. On February 19, CSL was a $341 stock and has been as low as $270. That price brought in buyers who’ve made a small fortune exploiting the Coronavirus containment policies.

So there are two reasons why you have to hope and pray for a quick flattening of the curve in the US.

The first is you want the death rate in the States to fall away and you want another leg up for the stock market. And when that curve flattens, convincingly, share prices will surge. And the sooner this happens there could be another payoff that worrywarts are not factoring in.

Too many ‘experts’ complain about the potential trillion dollar debt that will be left behind by this virus, but the actual debt could end up being a lot less, if the health threat disappears faster than the worst case scenario predicts.

You see, the numbers released by the Government about what its rescue programme will cost are based on say a six-month programme of support. But what if it’s only three or four months? Well, if that happens, the cost of the stimulus package will be less.

No one knows what the rebound will look like because these are unchartered waters. And while it’s natural for most commentators to hug the negative stories, the history of life actually shows more optimistic outcomes have much better form.

The chart below shows what the All Ords Index would have looked like over the period 1875-2012, only three years after the GFC ended, when the stock market fell over 50%. You can see that upward sloping curve, unlike the Coronavirus curve, doesn’t have a tendency to flatten out over time. Over the long run, it slopes up at a fairly constant rate. The drops are crashes or corrections, while the spikes are booms. But what you can see is that there’s a constant rising of the value of companies and it takes the wealth of investors with it. This is showing how the economy grows over time and profits as well as stock prices follow suit. It’s why I tell people that a portfolio of stocks as good as the 200 stocks in S&P/ASX 200 Index, which tracks the biggest 200 listed companies in Oz, rises at a rate of 10% per annum over a 10-year period, where half of that return comes from dividends.

Source: Wikipedia

Mark my words: when the US sees that its curve is flattening, the stock market curve will steepen in the right direction. Overnight, the CNBC headline for the European stock markets proves my point: “European shares close 3% lower after US warns of soaring Coronavirus death toll.”

And it wasn’t helped by the supreme optimist, Donald Trump, telling the American people “a very painful two weeks” lie ahead.

It will be painful for humanity. And if the numbers don’t show containment policies are working, it will be painful for stock players on Wall Street. And that means bad news for us!

The Dow closed down 973 points (or 4.44%) to 20,943 on the back of bad numbers, showing US infection cases have passed 200,000, which is double the number of five days ago. And Florida has been thrown into lockdown, which seems a little late, given it’s the retiree-capital of the USA!

The next two weeks will be vital for the US, the stock market and our super funds.

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