Opinion: Coronavirus – What Advisors Need to Know
By Paul Dietrich
Chief Investment Strategist
B. Riley Wealth Management
The short answer to Monday’s stock market decline is that this was primarily an excuse for Wall Street traders to sell stocks in a clearly overvalued stock market. The fear of an unknown global virus is always a good catalyst (and excuse) to sell off stocks in an overvalued market—even if the fear of that virus isn’t based on many facts or real data.
Last Thursday, I spoke to Liz Claman on The Claman Countdown right before the New York Stock Exchange’s closing bell in New York on the Fox Business Network and I talked about how overvalued the stock market appeared to be. At the time, I felt that we would have a correction very soon, and that it could be caused by anything—a Trump Tweet, the Coronavirus or something else. It now seems it was the Coronavirus!
Paul Dietrich, B. Riley Wealth Management, Chief Investment Strategist,
Fox Business News 2 20 2020 The Claman Countdown
After the recent run-up, and before Monday’s decline, I believed the Stock Market was clearly over-valued: According to FactSet, the current 2020 forward 12-month Price Earnings (P/E) ratio for the S&P 500 Index is 19. This current forward P/E ratio is 13% higher than the 5-year average forward PE of 16.7 and significantlyABOVE the 10-year average of 15. 2020 consensus earnings are expected to grow by 8% and revenue by 5.2%. (source; FactSet – February 21, 2020.)
Monday’s Stock Market Decline
The Dow Jones Index fell 1,031.61 points, or 3.6%, to 27960.80, its sharpest decline in point and percentage terms since Feb. 8, 2018. The S&P 500 dropped 111.86 points, or 3.4%, to 3225.89, with all 11 sectors posting declines. Both indexes have now lost all their gains for 2020.
The S&P 500 and Nasdaq had set records as recently as last Wednesday but have dropped 4.7% and 6.1%, respectively, over the past three sessions. The Dow industrials are off 5.4% from their Feb. 12 record.
The technology-heavy Nasdaq Composite suffered the steepest losses, retreating 355.31 points, or 3.7%, to 9221.28, as investors dumped many of the largest tech stocks that have powered the long-running rally in U.S. stocks. The index still has a 2.8% gain for the year.
NOTE: One of the ways you can determine the real reason for a market sell off is by looking at the stocks that are being sold. It is clear that Monday’s stock market decline was because Wall Street traders were selling off overvalued stocks. It had very little or nothing to do with the Coronavirus.
For example, Alphabet (Google) (-4.2%), Microsoft (-4.3%), Amazon (-4%), Facebook (-4.4%). These companies have almost no exposure to China and yet they all declined lower than the S&P 500 Index. That makes no sense if the reason for the sell-off was because of the Coronavirus!
Here Is What We Know About the Coronavirus
- So far, there have been 2600 deaths worldwide, almost all in China. There are 53 cases in the US, and almost all of those came from the Diamond Princess cruise ship in Japan. There have been no deaths of Americans in the U.S.
- The World Health Organization (WHO) announced today that the outbreak in China had peaked and that the epicenter of the virus in Wuhan in Hubei Province had seen a slowing of new cases.
- The WHO praised the Chinese Government for taking drastic steps to contain the virus by quarantining whole cities and forcibly arresting people suspected of carry the virus.
- The WHO today stated that they believe they have now found an effective treatment for the Coronavirus in a drug, “Remdesivir,” made by the pharmaceutical company, Gilead.
- The CDC has stated that most cases of this virus are not life-threatening, which is also what makes the virus a historic challenge to contain.
- The U.S. Center for Disease Control (CDC) has stated that they believe most people in the U.S. have some protection from the Coronavirus if they have had a flu shot.
- Many Wall Street firms have determined that the virus would not have any significant long-term impact on the economy and stock market. Most believe that it will have a short-term impact on some industries and the supply chains in China.
- According to Goldman Sachs, the economic impact to the U.S. and global economy will likely be just a one-quarter hit to earnings and the economy. Economists at Goldman Sachs, who were expecting first-quarter domestic growth of 2 percent as recently as late January, have lowered their estimate to 1.2 percent on Monday.
- According to the Wall Street Journal, the last time the SARS virus outbreak hit China in 2003, the global economy emerged relatively unscathed.
- Wuhan in Hubei Province is the epicenter in China of the Coronavirus outbreak. According to the China Daily newspaper the six largest industrial provinces opened all of their factories on Monday. Companies like Volkswagen have also reopened their production facilities. This means that most of the supply chain disruption will be limited to about 21 days since the end of the Chinese New Year when everything was closed down for about two weeks.
How Should Investor’s React?
Stay invested in the stock market! If you look at the historical stock market performance charts when there were similar fears over the SARS virus and the MERS virus, they were all short-lived and investors were rewarded for staying in the stock market.
Most of the leading economic analysts currently believe this could have about a -0.8% impact on this quarter’s economic growth. Any supply chain shortages will be made up quickly, and like previous virus scares, will have little to no impact on the long-term U.S. economy.
Despite this market correction, the U.S. economy is still growing and expanding. Remember 70% of the U.S. economy is driven by the consumer sector. So long as unemployment remains low and wages continue to rise, the economy will continue to grow and expand.
- I always tell my clients when they are getting nervous over some stock market correction:
- Investors always need to be able to distinguish whether stock market volatility is caused by (1) political or foreign policy issues or health issues in other countries (2) or whether they are caused by more serious underlying economic issues.
- Investors always need to ask the question, “Does today’s “breaking news” change the long-term outlook for the economy or corporate profits? Are people still going to go to work tomorrow in Detroit and Atlanta? Are they still shopping at Walmart and Costco this weekend?”
- If the issue doesn’t affect the underlying U.S. economy or a person’s ability to work, investors should ignore the stock market volatility and not panic. When the stock market goes down because of political or foreign policy issues, it is almost always a short-term correction if the problem does not affect the long-term economic fundamentals of the overall economy.
- This is Economics 101!
These stock market corrections, fueled by political, health, foreign policy or governmental issues, usually last only a month or two, and, when investors see these issues do not impact the underlying economy, the market recovers quickly. These correction recoveries are usually V-shaped—fast and high. In these situations, investors who panic and sell, almost always lose money.
Paul Dietrich currently serves as Chief Investment Strategist with B. Riley Wealth Management, Inc., where he focuses on managing investments for private investors, retirement funds and private institutions throughout the United States. He previously served as CEO and Chief Investment Officer with Fairfax Global Markets, LLC, and as CEO and Chief Investment Officer of Foxhall Capital Management. He also worked as an international corporate attorney with Squire, Sanders & Dempsey (now Squire Patton Boggs) and Jones Day. He is a frequent on-air commentator and regularly contributes his market analysis to business and financial media.
Securities and advisory services offered through B. Riley Wealth Management, Inc., Member FINRA/SIPC. These statements, or any other opinion posted on this site, are my opinion only and neither represent nor are indicative of B. Riley Wealth Management’s overall opinions. For important disclosure information, please visit https://brileywealth.com/legal-disclosures/