The alarm bells are ringing further and louder everyday from market participants that the market is becoming insane given the price action despite worrying comments from experts on the coronavirus which could infect 40-70% of world population in a worse-case global pandemic case. Meanwhile equities are bid as the narrative of dual stimulus from monetary and fiscal sources will offset any slowdown and supply chain disruption.
As we have said multiple times we put less weight on equities these days as they are clearly driven by the technology sector which is filled with quasi monopolies reflecting earnings power that is not reflecting the overall economy. The concentration risk is also alarmingly high in the S&P 500 with the 10 largest stocks now representing 24% of the overall index.
This means that equities have lost its signal value in relation to the fallout from the coronavirus and thus we cannot emphasize enough to watch commodities such as crude oil, iron ore and copper for real insight into the demand picture in China. Brent crude was bouncing back the entire last week but the momentum seems to have stopped for now but overall the price level reflects low demand and in theory we would expect equities to reflect this view but global equities are basically sitting at all-time highs. However, global logistics and transportation companies have been suffering recently although not sending stress signals.