Stocks plunge over coronavirus fears, possibility of longer economic shutdown

Wall Street suffered another volatile day on Wednesday, with the Dow sinking over 900 points over intensifying coronavirus fears, and the possibility of an extended economic shutdown. Great Hill Capital Chairman Thomas Hayes joins The Final Round to discuss his outlook for the financial markets, as the COVID-19 outbreak worsens.

Video Transcript

MYLES UDLAND: --a quick check of the market right now, because we are losing some steam as we head towards the closing bell. The Dow is now off more than 1,000 points. The S&P 500 seeing the sharpest losses, benchmark index off some 4.8%. Of course, we've got the worst first quarter that we've seen for the Dow in history during yesterday's session, starting off the month of April here on a down note.

Let's talk to Tom Hayes right now-- he is the chairman of Great Hill Capital-- for a little bit on how he's seeing this market. And Tom, I guess we'll just kind of start with where you think we are in this whole thing. We spent, what, the last week and a half saying, is this the bottom? Is his the bottom? And I always kind of felt like that was the wrong question to ask. What are you looking at right now?

TOM HAYES: Well, Myles, we have a bad news, good news market. The bad news is, now the market is starting to understand the headlines are going to get worse, the case count and the death count is going to get worse. So that's kind of known at this point. Here's what the good news is. We've got all kinds of estimates for Q2 GDP down 20%. I think you mentioned maybe down 30% The average is somewhere in there.

Let's use round numbers. If you've got a $20 trillion economy, $500 billion a quarter, 20% contraction-- so you've got $1 trillion in Q2. Let's say it goes into Q3 $1 trillion and a half, $2 trillion of contraction. So we've got a $1 trillion to $3 trillion pothole that they're now filling with $7 trillion to $9 trillion of asphalt if you can get there.

So we've got $2 trillion of stimulus of direct payments and loans to small businesses. We have the $4 trillion extension by the Fed. So that package goes up to $6 trillion. You've had the Federal Reserve increase their balance sheet by over $1 trillion since August of last summer, and more than half of that's come in the last couple of weeks. So we have a tremendous amount of stimulus. But the minute we can get that case curve to flatten, the market is going to start to discount the good news versus what it's done for the past two months, which is discount the bad news.

MYLES UDLAND: Well, Tom, I would ask, though-- you do that math, and it sounds appealing, that basically you look at the GDP hit, and we've back-filled it with all this stimulus. And I guess I would ask, is the market here potentially going to get ahead of where the real economy is? Because we can talk about $2 trillion, $4 trillion, $6 trillion dispersed to people.

But the reality is, we're going to have 12 to 15 million people out of work in six weeks. And maybe 70%, 80%, 90% of those jobs come back over time, but there is going to be a deep economic hole to dig out of in May. And I'm not sure that if you look at the stimulus right now, it has quite accounted for the severity of that. But as you note, the market is certainly getting excited about some of these things.

TOM HAYES: Warren Buffett has been saying, if you wait for the robins to sing, it's already spring. Sometimes you have to start to nibble when it's darkest. We're not saying go all in, and we're not saying this is the bottom by any stretch of the imagination. But what we're seeing, Myles, in this type of market is, some of the highest-quality businesses cut in half.

And if you look out a year, two years down the road, even three years down the road, Wells Fargo dropped 52% peak to trough. J. P. Morgan dropped 42% peak to trough. United Technologies down 56% peak to trough. So even if you made the mistake of buying in October of 2008, right after Lehman crashed and the markets went down another 10% to 20%, by March, you look silly for the short term. But by June of 2009, you looked like a genius when everything rebounded.

So on red days, we're slowly adding cautiously and judiciously for the highest-quality companies, companies that have been around for decades, that are going to be around for decades to come. And we don't know if it's going to be the bottom. What we do know is, consensus, everybody is looking for the retest of the bottom. And when everybody's looking for the same thing, sometimes you don't get it. So that either means we blow past it, or the market consolidates here and doesn't let anyone in, and we start to discount as that case curve improves in coming weeks.

So what are the catalysts that could help? Obviously, a treatment. So they have the tests going in New York. They have the remdesivir test that we should be getting results in the next week or so. So those will be some things that are constructive. We're starting to get some talks with OPEC. Who knows if anything happens there. But I can tell you one thing. If they did get some movement on that front, you'd see credit markets calm overnight. So that's a possible catalyst.

And just a tremendous amount of opportunity. So if you're a trader, it's nearly impossible-- you're not going to call the bottom. But if you can take a one- to two- to three-year view, they're offering unbelievable properties, unbelievable companies at steep discounts. And maybe we'll get lucky, and you will get the retest, and you can go back and get that 52% discount in Wells Fargo.

I know your last guest, Myles, was talking about banks. But the last time managers were this underweight banks was July of 2016. This is according to the Bank of America Global Fund Manager Survey. They went up double in the next 18 months. I'm not saying that's going to happen, per se, but you asked the perfect question, which was, are they going to make money from the stimulus?

Well, there was an article in the "Financial Times" this morning-- they're going to make 1% to 5% origination fees on these new loans, up to $4 trillion, which means you could see $10 to $15 billion of earnings come from this program for the major banks. So there is selective opportunity if you take the longer view, Myles.

- Hey, Thomas. I guess you can call it the pandemic paradigm shifter. I don't know what we want to dub it here. But you rightfully point out that a lot of the operations for even US companies in China have reopened, whether it's the Starbucks or the Disneys or the Apples.

But isn't there this lag time or effect that we're not taking into consideration, especially because pre-pandemic, we were already flagging concerns that the Chinese consumer was slowing down, that manufacturing was slowing down, that the economy was not in good shape? So how do you anticipate just because of these new openings, or that things are, quote unquote, back to normal-- can we really anticipate that to be a welcome light at the end of the tunnel?

TOM HAYES: Yeah, well, we don't know exactly. And that's a great question. But I will say, the Chinese PMI came in at 52 for the month of March, which was well in excess of expectations coming off the low in February of 35.7. Even the US, which is kind of a number you can't pay attention to in March, was slightly better than expected this morning.

So I think the market has really started to look for the worst-case scenario, particularly because the financial services community is somewhat concentrated in the hot spot here in the tri-state area. So for us, it's real. It's palpable. We know people who are being affected by this. So you can't get perfect quantification. That's why the only way, I think, you can get a win out of this is if you do take the one-, two-, three-year view, and you do only buy the highest-quality companies.

And by the way, some of them might shave dividends, but a company like Wells Fargo at the trough was paying a 7% yield. What if they cut it in half? I'm not saying they will, but 3 and 1/2%, 4% to weight, and a company that's down 50%-- as that recovers over the next three years, that's 100% return. You're not going to beat that in any index for sure.

MYLES UDLAND: All right. Tom Hayes is the chairman at Great Hill Capital. Always good to talk to You. thanks for calling in. We'll talk to you soon.

TOM HAYES: Likewise. Thanks.