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This Stock Market Surge Could Have a Ridiculously Surprising Catalyst

This Stock Market Surge Could Have a Ridiculously Surprising Catalyst
  • The Dow, S&P 500, and Nasdaq ripped higher on Tuesday, building on Monday’s rally.
  • U.S. stocks have erased almost all of last Friday’s plunge.
  • The stock market’s next leg up may have a surprising catalyst: coronavirus

The U.S. stock market ripped higher on Tuesday, launching a suddenly-feverish Dow more than 400 points higher.

The stock market has now all but erased its brutal Jan. 31 sell-off, which came at the height of the coronavirus outbreak panic:

The Dow surged more than 400 points as the stock market erased its Jan. 31 plunge. | Source: Yahoo Finance

It’s tempting to argue that investors brushed off the spiraling coronavirus epidemic, which has surpassed 20,000 confirmed cases and 425 deaths.

That may explain the relief rally in Asian equities. But when it comes to the U.S. stock market, one $3 billion investment advisory firm says that coronavirus isn’t the rally’s greatest threat.

Cumberland Advisors believes the epidemic could be the market’s most surprising opportunity.

Why Coronavirus Could Inflate the U.S. Stock Market

No one doubts that the coronavirus outbreak will take a bite out of economic growth in China. The only question is how severe that bite will be.

A pronounced Chinese slowdown could rock individual U.S. stocks with heavy exposure to the mainland, but ING predicts that the U.S. economy is relatively immune to a sharp drop in Chinese GDP.

A Chinese economic slowdown would ripple throughout global markets, but the impact on the U.S. would be relatively small. | Source: ING

Goldman Sachs agrees. At least over the long term.

But the U.S. economy’s relative strength isn’t why Cumberland sees the coronavirus outbreak as a buying opportunity.

Citing commentary from Steve Wasserman, Cumberland Chairman and CIO David Kotok suggests that the damage to China and other Asian economies makes the U.S. stock market look a lot more bullish.

It is clear that the US will not be materially at risk and the CDC and all U.S. health agencies are all over this… So the panic in the market will pass, China will be very badly impacted and emerging markets will get crushed as China materially slows buying commodities until this passes and business gets back up and running.

There are a lot of US companies that do not do business in China nor in nearby countries. They will be fine. Treat the collapse in stock prices as a major buy opportunity.

Bloomberg Opinion columnist John Authers puts an even finer point on this investment strategy.

  • The epidemic will force central banks to keep interest rates low.
  • “Easy money” favors stocks over other assets.
  • The fallout from the outbreak will make the U.S. stock market the only game in town.

Cumberland is putting its money where its mouth is. Kotok says the firm has “lowered our cash reserves” and begun “scaling into the U.S. stock market” throughout the recent pullback.

Stock Market Bulls Must Stomach One Major Risk

But this investment thesis has one major downside risk. It assumes that coronavirus remains a nonfactor within the United States.

Only 11 U.S. cases have been identified to date, but former FDA Commissioner Scott Gottlieb has repeatedly warned Americans to brace for a full-scale outbreak.

Speaking on CNBC, Gottlieb said he expects the virus to reach “pandemic” proportions. There will be U.S. outbreaks – that’s not up for debate. But the government’s response will determine how catastrophic those outbreaks become.

“I think it likely will [become a pandemic] at this point. We will have outbreaks here in the United States,” Gottlieb said. “Now, a small outbreak doesn’t need to become a large outbreak, a large outbreak doesn’t need to become an epidemic here in the United States. There’s things we can do, but we’re going to need to change our posture.”

This article was edited by Sam Bourgi.

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