Covid-2019 and Bernie-2020
As we predicted, asset markets are correcting commensurately to past reactions during pandemic crises, just as the coronavirus crisis is probably cresting. But it’s more: they are reacting both to breakouts ex-China, and to Sanders’ big win in Nevada. Covid-2019 daily new cases in China have been consistently under 1,000, and the outbreak ex-China has not topped 400, and has not grown for 3 days. There are only 45 deaths ex-China, implying a fatality rate of about 1.5%. The alarming statement by the CDC is typical for public health officials seeking to raise awareness and enhance preparedness, similar to the false-alarm about Ebola in 2014. Stocks have corrected similarly to prior pandemic panics, and the equity risk premium is now attractive. The Fed will likely cut rates in March or April to dis-invert the yield curve. Forward earnings have been remarkably resilient, seeming to look across the valley. Sanders’ bigger than expected win in Nevada is alarming to markets. But that doesn’t mean he can win in November, or even that he can win the Democratic nomination. In a crowded field in primaries that award delegates proportionally, he likely won’t have a majority at the convention, and would be unlikely to be nominated on the second ballot. If he is in first position yet is denied the nomination, it could tear the Democrats apart. Our quantitative model still strongly predicts Trump, with the most salient risk being a recession created by a worse than expected pandemic.