Coronavirus Panic Rolls Stock Prices to Levels Last Seen Five Months Ago
“If you can keep your head when all about you are losing theirs, quite possibly you don’t understand the gravity of the situation”
After a week where stock prices fell 12.9% from the all-time high set just 7 trading days ago, why are we so sanguine? Are we just idiots here at Heron Wealth? No, we are students of stock market history, which gives us the tools to properly evaluate the "gravity of the situation."
On average, there is a stock market correction (a decline of 10% in the S&P 500) or bear market (a decline of 20%) once every two years. The last major correction experienced by US stocks was during the 4th quarter of 2018 (S&P down 19.9%, NASDAQ down 25%.) The trigger then was the widespread fear of recession in 2019, which never actually materialized – stocks made new highs within 4 months of the 12/24/2018 low.
A number of market prognosticators noted that last week was the worst seen by US stocks since the 2008 credit crisis. An interesting comparison, but that bear market was driven by a banking liquidity crisis, the second-worst since the Great Depression (1929-1939.) The more appropriate model is how investors reacted after the September 11 attacks in 2001. Investors were blindsided by a terrorist assault that literally came out of the blue. Prior to September 11, most Americans knew nothing about the Middle East, nor could understand why 19 Sunni Arabs would commit such an act. By year-end, we were all experts.
When markets reopened the following Monday (9/17/01), stocks took just 5 days to fall 11.6%. However, by the following week, investors had obtained enough information to understand that while 9/11 was a human tragedy, it was not an economic catastrophe – stocks surpassed 9/10/01 levels by 10/11/01 (one month,) closed out the year 19.3% ABOVE the 9/21/01 low.
Stocks were on a tear in 2019, gaining three years of return in one. Last week’s sell-off gave up one of those three years. Even so, prices are only back to the levels of last October, which at the time looked pretty good!
Right now, we don’t understand Coronavirus, so our imaginations run wild. Risks that we know about don’t bother us at all. Last week five Molson Coors employees were shot to death by a disgruntled former co-worker – outside the immediate families of the victims, we’ve forgotten about that incident already because in the United States we regard 40,000 annual deaths from gun violence as a routine and acceptable risk.
Here’s what we know about Coronavirus so far (check here for updates):
Worldwide cases of 85,744
Worldwide deaths of 2,933
Mortality rate – initially 3%, now 0.7% for more recent cases as care protocols improve
Mortality is highest in patients 50 and older
Men are twice as likely to die as women
Men, 50 and older who smoke are most likely to die (with lungs and the immune system already compromised)
80% of case are mild – elevated temperature and coughing are common symptoms
20% of cases become severe as damage from the virus to lung tissue and the body’s own immune response causes extreme breathing problems, stress on other organs
Chart of deaths by country
Seasonal flu so far in 2019/2020 has infected 26 million just in the US, with 14,000 deaths for a mortality rate of 0.05%
Flu viruses (including Coronavirus) become less virulent as winter turns to spring - the protective coating surrounding a virus deteriorates more rapidly in warm weather; the virus dies before a host can be infected
For a Hollywood depiction of the "worst case scenario" watch "Contagion," a 2011 movie starring Gwyneth Paltrow as "patient zero"
A client asked this week if we were worried about Coronavirus getting out in our home city of New York. Given that New Yorkers are routinely exposed to medieval levels of germs on the subway, we’re doing what we do every day – try not to get sneezed on and wash our hands when we get to the office.
How does the virus outbreak affect stock prices? Across the planet, personal and business travel are severely curtailed, conferences and sporting events cancelled, whole cities in China quarantined, schools closed. A month ago, we thought GDP in China would drop from 6% to 2%. Now, with factories closed and exports halted, two quarters of 0% growth should be expected. As the world’s second largest economy shudders to a halt, world economic growth could slow from initial projections of 3.3% to more like 2%. In the US modest projections of 2.0% for 2020 could fall by 0.5-1.0%.
The forecasts for corporate earnings for 2020, initially 7.4% for 2020, are now being revised lower, with Goldman Sachs last week revising down their estimates to 0.0%. As we have always said, the stock market ultimately only cares about company revenues and earnings, and interest rates. Current interest rates at generational lows remain supportive, but investors’ fear of flat or falling revenues and earnings, and indeed recession, triggered the big selloff last week.
What happens next? As we know, investors overshoot the upside when stock prices are rising, overshoot to the downside when stock prices are falling. Even with reduced earnings this year, we estimate that the US stock market, currently down 8.3% YTD,is trading at quite the discount. According to the Morningstar Stock Market model that we rely on, stocks were trading 6% above fair value at the market high two weeks ago, and are now trading 8% below fair value. International markets, down 7-12% YTD, also look like a bargain.
Several of our clients have already asked if they should be putting cash into their accounts. We said, "Yes, and we’ll probably invest that cash within two weeks." Also, as we mentioned in previous bulletins, we have many new clients in the last year that are only 1/3 to half invested. We’ll be moving more of those funds into stocks in March.
We will host a conference call and webinar Sunday 3/1 at 6PM EST to discuss any further details we learn over the weekend. Click on the above or enter "Zoom.US" into your browser, select "Join a Meeting" and enter code 3475805280. We encourage participants on the call to email questions in advance to DavidEdwards@HeronWealth.com.