Market MovesFebruary 26, 2020

As Virus Punishes Stocks, El-Erian Warns: Don’t Buy the Dips

Pummeled shares will take a lot longer to recover than normal, Allianz economist says.

Reported by Larry Light

Buy the dip has been the oft-repeated advice during the 10-year-long bull market. But as exchanges worldwide reel from the baleful economic effects of the coronavirus, economist Mohamed El-Erian warned investors to back off the practice.

While scooping up declining shares cheaply worked in the past, because they promptly sprung back, he told CNBC, “I would continue to resist, as hard as it is, to simply buy the dip.” And that’s especially true for the stocks that have been the worst hammered amid the current rout, added El-Erian, the chief economic adviser at financial powerhouse Allianz.

The scourge of COVID-9, as the disease is also known, will be so thorough that recovery “will take time,” he said. “Economic sudden stops are hard to restart.” Previously, he had predicted that the virus would “paralyze China” and the results would “cascade throughout the world.”

As fears mounted about the spreading contagion, the S&P 500 on Tuesday plunged slightly more than 3% for the second day in a row. Airline, cruise ship, technology, and financial services stocks have suffered. Those with ties to China such as Apple (which uses Chinese factories to assemble iPhones) and Starbucks (whose coffee shops do big business in the world’s second largest economy) were slammed. Over the past two days, Apple is down 8% and Starbucks fell 5.7%.

Other economists are echoing El-Erian’s pessimism. Oxford Economics says that a global health crisis could erase $1 trillion from the global economy, estimated to be $86.6 trillion in 2019. Reasons for such a major loss include higher workplace absenteeism, lower productivity, reduced travel, disrupted supply chains, less international trade, and muted investing.

To David Levy, chairman of the Jerome Levy Forecasting Center, “at best, the economic effects of the COVID-19 outbreak are likely to be much worse than widely anticipated.”

Earnings forecasts are trending lower, at least partly as a result. The US consensus estimate for first-quarter domestic growth has dipped to 1.5%, down from 1.7% at year-end 2019, FactSet Research announced. Goldman Sachs recently warned that shrinking, virus-related earnings could lead to a market correction, which is a 10% slide from its peak.