Ebola to Alibaba Trigger Debate Over Cause of Stock Slide
Nicholas Colas was sitting in the green room, waiting to go on television in the pre-market hours of the morning of Sept. 19.
Photographer: Spencer Platt/Getty Images
Traders work on the floor of the New York Stock Exchangeon Oct. 10, 2014.
While the chief market strategist at ConvergEx Group LLC was booked to talk about Alibaba Group Holding Ltd.’s first day of trading, the state of the overall market was also on his mind. The two subjects were not necessarily unrelated.
“This feels like a top to me,” Colas said then. With the Standard & Poor’s 500 Index frozen in time at the previous day’s recordclosing level of 2,011.36, his hunch proved correct, at least in the short term.
The abundance of investor confidence needed to get Alibaba’s record $25 billion initial public offering off the ground was but one of several red flags that made the market feel top heavy to Colas that morning. And even now that the benchmark gauge has dug itself into a hole more than 5 percent below that all-time high, debate is raging over what exactly caused this dip.
If you believe last week’s decline in stocks was due to the International Monetary Fund cutting its global growth forecast, “then we have a bridge to sell you,” Dan Greenhaus, chief strategist at BTIG LLC, wrote in a note to clients today. A much bigger issue confronting the market is the spread of the Ebola virus, according to Greenhaus.
‘Unquantifiable Outcome’
“This is, by definition, a situation with an unquantifiable outcome and that it would create market uncertainty should hardly be surprising,” he wrote. “To paraphrase one of our smartest clients, ’If Ebola cases start showing up in other cities, it doesn’t matter what earnings do.’”
To Gina Martin Adams at Wells Fargo & Co., whose initial 1,850 year-end estimate for the S&P 500 is looking a lot more realistic than it did three weeks ago, the “crux of the market’s weakness” is still the Federal Reserve’s slow pivot to tighter monetary policy.
“We continue to view this turbulence as transitory, but likely to continue,” she wrote in a note to clients today. “We do not currently see a reason to doubt the long-term upward trajectory of earnings, and ultimately stock prices. Nonetheless, we continue to expect further shake-ups for the equity markets in the short run, as investors adjust to the new policy environment.”
‘Damaging Effect’
The volatility is a result of more than just “twitchiness” over U.S. earnings or whether Germany is slipping into a recession, according to Colas. Don’t forget the slide in commodity prices that took oil into a bear market and the decline in global bond yields, both of which undermine confidence in future economic growth. Then there’s a lack of confidence that the European Central Bank will be able to stimulate growth, plus the Fed’s plans to take a “still-weak patient off life support,” according to Colas.
“In isolation, all these catalysts would typically be manageable concerns,” Colas wrote to clients today. “However, we’ve seen U.S. markets respond negatively to Ebola headlines in the past week, signaling that perhaps the weight of several currently ‘smaller’ crises can have the same damaging effect as one large one.”
Like a high school kid facing a tough multiple-choice question on the SATs, sometimes the best guess is “all of the above.”
