It didn’t take long for Nouriel Roubini, the economist known as Dr Doom, to warn that the stock market selloff in late February was a signal of much worse to come, as he ranked the coronavirus among the “white swans” of 2020, meaning causes for financial crises that are predictable.
This approach does not always take into account the policy reactions to serious problems, which complicates the real-world task of hedging and positioning for the impact of an epidemic.
Selling of consumer and airline stocks in expectation of weak demand is logical, but so is anticipation of even lower interest rates due to attempts by central banks to cushion the impact of a downturn.
And betting on a boom in safe-haven commodities such as gold and silver in reaction to renewed rate cutting might be problematic. Financial stress is often accompanied by sales of liquid assets to cover collateral calls, which can distort individual markets.
Higher volatility generally boosts trading revenues for banks, at least temporarily.
Signs of strain
On the second day of a 7% downturn in US stocks in late February and a rise in the VIX option index to 27, JPMorgan said at its annual investor day in New York that it anticipated a double digit percentage increase in its first-quarter trading revenues compared with 2019.
