Market Selloff May Be Brewing, But How Deep Depends on Who You Ask

Yesterday's trading day wasn't exactly a big winner for investors. It was regarded as the biggest selloff seen since October, driven by a combination of concerns including issues around the ongoing coronavirus emergence. Yet this may just be the beginning, as market strategists are analyzing the market and suggesting more selloff could be coming, and even bigger than before. Just how much of a selloff is afoot, though, seems largely depending on who's being asked.

A Disaster, a Catastrophe, or Something Else Altogether

Merrill and Bank of America (NYSE: BAC) Private Bank head of CIO market strategy Joseph Quinlan seems to be espousing a growing consensus view: we just plain don't know enough about the market at hand to determine just what kind of selloff is in store. Quinlan is among a hefty population of analysts and strategists who aren't expecting a huge selloff, but rather a more sedate one.

Some analysts are looking for a selloff around 5%, while others are looking for a 10% drop to follow. Others still are expecting both more and less than this range.

The sheer amount of variables involved in recent days is causing the biggest problem for those like Quinlan. The coronavirus is easily one of the biggest such issues, but the lack of overall data emerging about it is playing hob with forecasts. We know, for example, that the Chinese government has been attacking the spread of the coronavirus in ways that might even seem draconian—at last report, it had locked down 13 separate cities with a total population of over 33 million people—but has the move been sufficient, and sufficiently timely, to matter?

Such questions plague forecasters, and since these aren't the only such questions on hand, the amounts of the selloff are putting up an expansive range.

So Many Questions, So Few Answers

Naturally, the coronavirus and its impact on markets—from retail to pharmaceuticals—are a big weight on forecasts. The fallout of actions taken in response will also play a part. Yet this outbreak, as big as it may be, is just part of what's driving forecasting in the short term.

Those who believe that any selloff will be a limited sort of affair are pointing at Federal Reserve policies, which have been very helpful to markets lately. An October rate cut seems to be holding, and the purchase of Treasury bills to expand the balance sheet has given the markets extra liquidity to work with. That's leading some to believe any selloff will be under five percent, which isn't exactly much of a selloff to begin with given the gains the market has seen in the last three years.

There's also a growing amount of concern around the upcoming US presidential election—and yes, that really is just about nine months away—and the potential for change in the government. Four more years of Trump, of course, would have a fairly predictable outcome. Yet four years, maybe even eight, of one of the Democrats may represent a destabilizing element that would shake the market to the ground. With Bernie Sanders doing well in Iowa, the notion of a man with what might be described as “market-unfriendly” policies and leanings in the Presidency may represent a serious selloff as investors take what they can get.

It's Probably Coming, but What It Will Be When It Gets Here? Who Knows?

A selloff is pretty much inevitable, at some point. Whether it's just profit-taking or genuine concern about the overall trajectory of the market—or some combination of factors all at the same time— investors will be selling shares at some point here, and in pretty substantial quantities. If there's one thing even an elementary market investor knows, it's that stock prices do not go up forever. A recession will have to hit eventually, and that's going to drive changes in investing as well. The market has done amazing things in terms of keeping away recessions and selloffs and most every breed of a downturn, but that can't go on indefinitely. So for right now, enjoy the very substantial gains we've seen so far, and consider taking a hedge position or two. It never hurts to have a plan B, and a market working this high up may take quite a fall.