• The coronavirus outbreak has reached a point where people are restricting their travel en masse.
  • Traders are selling stocks on this development, and out of concern that behavioral changes will hurt tax receipts and consumption, according to Jim Carney, CEO of the hedge fund ParPlus Partners.
  • In an interview with Business Insider, he outlined four ways investors can protect their portfolios in this uncertain climate. 
  • Click here for more BI Prime stories

The stock market’s plunge this week begs the question of what has changed since China reported its first coronavirus fatalities mid-January. 

For one, fatalities are spreading far beyond China’s borders to other financial powerhouses like Switzerland, Spain, and Italy, the world’s eighth-largest economy. 

But the real game changer for market participants is that the disease is forcing widespread behavioral changes that will slow consumption and tax receipts. And no industry will more severely hurt the global economy than travel, according to Jim Carney, the CEO of ParPlus Partners, a volatility-trading hedge fund with $506 million in assets under management. 

Consider that Hong Kong is on track to report a 99% year-over-year crash in the number of February visitors, according to data compiled by Bloomberg. That would translate to 3,000 arrivals versus roughly 200,000 in February 2019.

Besides this stunning drop, there’s more evidence that growing numbers of tourists and business travelers are halting their plans.

Investment banks including Goldman Sachs and Citigroup are restricting travel to Italy, according to Reuters. Additionally, the Tokyo Olympics may be called off if the coronavirus is not contained within three months, the AP reported.

Clearly, the coronavirus has become a legitimate reason to stay put — and it is this behavior that will have the worst knock-on effects on global growth, Carney said. 

“I can’t imagine that a lot of people are going to hop on an airplane to go visit Milan this year,” he told Business Insider by phone.

Read more: BLACKROCK: Coronavirus fears have upended the most enduring drivers of stock returns. Here are 3 ways to stay afloat and beat the market.

Against this backdrop, he found it unusual that Monday’s sell-off was orderly in the sense that there was no forced-selling pressure — just traders taking profits near record highs. The CBOE put-call skew, which measures the degree to which investors are hedging against losses relative to their bets on gains, rose to only a three-week high. 

This orderly sell-off could deteriorate at any time, however. And given the unknown risks, Carney shared these four recommendations on how traders should be positioned.

1. If you’re going to be long stocks, bet on defensives, not high-beta names that are closely correlated with the S&P 500.

He simply compared how exchange-traded funds that track both kinds of stocks performed on Monday. The iShares Edge MSCI Min Vol USA ETF, which consists of potentially risky stocks, fell 2%. Meanwhile, the Invesco S&P 500 High Beta ETF slumped nearly 5%.

2. Now is not a good time to bet against volatility.

“I’m not saying go massively long,” Carney said. “But you’d have to be out of your mind to be short too much vol. We don’t know what’s going to happen. But it’s definitely a time for caution.”

Carney previously sounded the alarm on using weekly S&P 500 options as a tool to bet against sudden price swings.

3. Avoid airlines with leverage and exposure to Europe.

It won’t take much escalation in the coronavirus outbreak to push these companies to the brink, Carney said. 

4. Watch out for crude oil prices falling below $50 per barrel.

Like the airlines, indebted oil companies could be in peril if oil falls below this key level — and especially if it tumbles to $45, Carney said. Oil has tumbled 12% since the outbreak of coronavirus, with WTI crude dropping to as low as $50.69 on Tuesday.

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