Former Morgan Stanley Chairman On Coronavirus: ‘Pretty Serious Reckoning’

Stephen Roach, former chairman for Morgan Stanley in Asia and now a senior lecturer at Yale, believes that the coronavirus will considerably weaken a global economy that was already in a delicate situation to begin with.

“If the global economy is as weak as I think it is in the first half of this year, that points to a pretty serious reckoning for frothy financial markets,” said Roach.

While the markets have largely been down due to the coronavirus, there have still been some significant positive days for stocks.

Roach is not having it. “Irrational exuberance never makes sense,” said Roach.

“As long as central banks are opening up the liquidity spigot as wide as they are, the markets pay absolutely no attention to any potential threats to economic activity.”

“It’s the here and now, and it works until it doesn’t.”

Roach points out that while the U.S. had an excellent year for stocks last year, these gains weren’t felt all over the world.

Roach believes that Japan may have fallen back into a recession, even before the coronavirus hit, and the industrial output data out of France and Germany in December did not meet expectations.

Now with the coronavirus putting the whole global economy at risk, Roach sees the U.S. stock market’s status as a financial haven in jeopardy.

“With Europe and Japan and China in trouble, the US certainly will not once again be the oasis the market seems to think it will [be] in 2020,” he said.

Declining stock buybacks

Before the markets began to react to COVID-19, more commonly called the coronavirus, stock buybacks were already at a seven-year low.

“If this is a sign of a much lower run rate of buybacks, it would be worrying given how dependent the market is on corporate buying of equities,” AB strategist Mark Diver wrote in a note.

“We do not think this is the case.”

Diver and his team at AB believe that companies are becoming more judicious over when they execute their company’s buyback plan.

“Companies with large buyback programs are perhaps becoming more discerning in the timing of execution of their buyback programs and maybe delaying repurchases until a more attractive entry point presents itself,” wrote Diver.