This is a Coronavirus market. We've got two things going on here: The human aspect and the economic aspect. Both are emotionally charged. And the good news is that it’s going to be OK. Seriously. It really is. It might not always feel like it at any given moment. And I’m not trying to take away from the reality of the situation. More people are going to get sick. A lot more. But it’s going to pass after that. For the most part, we’re going to have some battle scars. We’re going to have some loss. But it’s going to be OK for probably all of us here.
There are a great deal of unknowns. But market-wise, it is largely necessary policies that will drive future price action. There has needed to be social distancing. There may have to be a “shelter in place” quarantine, which I believe is at least partially, if not largely, priced into the market. To understand the real drivers of future price action, it’s important to go back to basics. Stocks are priced based on future earnings. Given quarantines and self-isolation policies, people will spend less money on products and services. Many corporations will then have lower earnings. That will hurt those companies’ stocks.
Further, if trade is cut off domestically and / or from other nations, that will be a drag on the domestic and global economy. We only have to go back a couple of months to have seen that in action with the trade war. When more tariffs were proposed, stocks tanked because tariffs curtail trade. If trade is limited, it will weigh on stocks—somewhat.
That's the fundamental valuation concept. But because of both the human aspect of the virus and the psychological aspect of such a profound drop in stock prices, we get a lot of noise in the market. Further it’s been discovered that foreign powers are spreading false information to create panic and chaos in our society and our markets. Despicable. So, don’t believe everything you hear—ESPECIALLY RUMORS. Prepare. Be smart. Keep a level head.
But here is the inevitable truth: As more reliable information on the pace of the spread of the virus and expected economic impact is made available, analysts can model expectations for the effect on earnings of individual companies. Those level heads will prevail and real price discovery returns to the financial system.
At the time of this writing, the S&P 500 was down roughly 30% from its high. Will the future corporate earnings of those 500 companies collectively cede 30%? I believe that’s an unlikely scenario. If the world economy entirely froze for 2 weeks, that’s 1/24th of a year lost, or around 4%. It’s not lost on me that that’s a non-direct relationship and fuzzy math at best. If that happened it could temporarily impact unemployment and consumer spending could suffer some as a result, etc. But it’s also a fact that a handful of companies are currently thriving. Who is not using Zoom (ZM) or similar platforms now? Gilead Sciences (GILD) is getting closer to a treatment for Coronavirus. Amazon.com (AMZN) announced last week it is hiring 100,000 workers to keep up with expected demand. The economy will take a hit, warranting lower stock prices. But this low? I think that’s probably unlikely.
Bottom line is, keep your head. Trade your plan. And take advantages of the opportunities available, of which there are many.
Founder and President
Market Taker Mentoring, Inc.