The Tell: Stocks fell Thursday because investors realized ‘too many traders are running with scissors,’ says strategist

U.S. stocks swooned early Thursday trading without any discernible news trigger, raising questions as to why investors were selling risk assets in a hurry when the manufacturing supply chain risks and economic growth concerns around the COVID-19 epidemic have been kicking around for several weeks.

Yet bond-market analyst Jim Vogel feels investors shouldn’t search too far for answers. He argues that too many stock investors assumed that the economic problems from the coronavirus are merely a blip, and that it made sense to fade any selloffs as global health scares usually have a fleeting impact on risk assets.

But now some traders are waking up to the realization that the damage could spill beyond the first-quarter and result in a more lasting and painful correction to global growth forecasts for the full year of 2020.

“It’s as though [markets] suddenly realized too many traders are carrying scissors. So, they slow down, take profits, and wait to see if someone else stumbles while still running at full speed,” said Vogel, a rates strategist at FHN Financial, in a Thursday note.

Since their initial drop Thursday morning, U.S. equities have pared losses. The S&P 500

SPX, -0.38%

   index and the Dow Jones Industrial Average

DJIA, -0.44%

  are both down around 0.4% on Thursday, after falling as much as 1.3% early, according to Dow Jones Market Data.

This comes a day after the broad-based benchmark S&P 500 index and the Nasdaq Composite closed at records on Wednesday.

Meanwhile, U.S. government bonds trading appears to reflect heightened worries around the virus, as investors have bid up haven assets. The 10-year Treasury note yield

TMUBMUSD10Y, -2.06%

  is trading at 1.525%, around 20 basis points away from its all-time low of 1.32% set on June 2016.

As the coronavirus threatens to disrupt trade and travel not only in China but also in Japan and South Korea, economists have cut their global growth estimates for this year, but equity fund managers have mostly shrugged off such concerns.

“Since Feb 11, risk asset markets have been running with scissors, assuming that because most of the world is insulated from the ravages of Covid-19 in China this particular problem eventually will be a Q1 blip not visible for the full year,” said Vogel.

The brisk optimism reflected in stocks until Thursday may not just be down to the usually sunny disposition of equity investors.

Part of the issue could be that analysts have been reluctant to offer more dire forecasts of the coronavirus impact on the world’s second largest economy.

Maura Murphy, a portfolio manager at Loomis Sayles, said there’s a disconnect between her conversations with analysts and China’s growth estimates for 2020.

She said some analysts have voiced fears that Chinese economic growth could stay flat in the first-quarter of this year, falling short of its usual 6% rate of expansion, but are unwilling to “stick their neck out” and put their actual prognostications into writing.

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