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‘Perversely, the more fear the better’ — what investors are waiting for before calling the bottom

Traders work on the floor of the New York Stock Exchange (NYSE) on March 18, 2020 in New York City. The Dow fell more than 1,200 points today as COVID-19 fears continue to roil world markets.

Spencer Platt | Getty Images

Some investors are taking a counterintuitive approach when looking for a bottom in stocks amid this historic sell-off: They are waiting for the coronavirus headlines to get much scarier before buying.

Under normal market dynamics, investors and traders would wait for headlines around key catalysts to start improving before jumping back into riskier assets such as stocks. One example of this dynamic was seen during the “phase one” negotiations of the U.S.-China trade deal. As headlines improved and it became clear that a deal would get done, stocks started to turn around.

However, given the fast-spreading nature of the coronavirus, some market players think the more people panic, the more likely they are to adopt measures such as social distancing to curb the virus spread. The scary headlines would also push lawmakers to implement stronger policies to curtail future infections. This would then ultimately curb the long-term damage to the economy.

“Perversely, the more fear the better, because the best cure for a viral pandemic is a viral panic,” said Ed Yardeni, president and chief investment strategist at Yardeni Research, in a note Tuesday.

More than 9,400 coronavirus cases have been confirmed in the U.S. with more than 100 deaths, according to data from Johns Hopkins University. Globally, more than 200,000 people have been infected while over 8,000 have died.

Growing coronavirus cases have led authorities to take actions aimed at mitigating the spread. The Italian government imposed a nationwide shutdown. President Donald Trump declared a national state of emergency last week. Several states and cities in the U.S. have also restricted restaurants to takeout and delivery orders only, including New York. Authorities are also encouraging the practice of social distancing, which consists of avoiding large gatherings and staying home as much as possible.

‘Flatten the curve’

These measures, in theory, would “flatten the curve” of confirmed coronavirus cases. Flattening that curve would keep the U.S. health-care system from being overrun with too many virus cases in a short time period. However, these steps have also raised concern over a sharp economic downturn, sending stocks tumbling.

The S&P 500 officially entered a bear market last week, closing more than 20% below a record set Feb. 19. That decline ended the market’s longest bull run, which kicked off in March 2009. As of Wednesday’s close, the broad index was more than 29% below its all-time high.

Bill Ackman, billionaire investor and founder of Pershing Square Capital Management, thinks the administration needs to take more drastic measures, noting the U.S. should shut down the country for 30 days. 

We need to shut it down now. … This is the only answer,” Ackman told CNBC’s “Halftime Report” on Wednesday. “America will end as we know it. I’m sorry to say so, unless we take this option.”

“Hell is coming,” said Ackman. “Capitalism does not work in an 18-month shutdown, capitalism can work in a 30-day shutdown.”

Hysteria is positive

Most investors and strategists have been hesitant to call a bottom for this sell-off, given the situation’s fluidity. Many also expect the number of coronavirus cases to jump sharply from current levels, adding to the overall panic.

However, rising fear over the coronavirus may be just what the market needs, according to Ricky Sandler, CEO of hedge fund Eminence Capital.

“I think the people are totally missing what is happening here. Every new headline, every new hysteria is making people more nervous and it’s actually very, very positive,” Sandler told CNBC’s “Halftime Report” on Monday. “It’s all helping to contain the problem.”

Worsening headlines around the virus have also increased expectations for fiscal stimulus in the U.S. The White House is seeking somewhere between $850 billion and more than $1 trillion in fiscal stimulus to soften the virus’s economic blow.

Treasury Secretary Steven Mnuchin said Tuesday that corporations and individuals will be to defer up to $10 million and $1 million, respectively, on tax payments, noting: “Americans need cash now.”

But Jim Bianco, president and CEO of Bianco Research, thinks more news and data will be the key for the market to reach a bottom.

“This looks open-ended, and that’s why I think these markets are having such a hard time with it,” Bianco told CNBC’s “Fast Money” on Monday. “If you can give me or the markets in general some kind of definition of how big the problem is, then we can find a bottom real fast.”

— CNBC’s Jesse Pound contributed to this report.

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