Coronavirus Fears Grip Markets
Coronavirus Fears Grip Markets
Over the past two days, fear over the coronavirus has roiled markets around the globe. The S&P 500 and Dow Jones Industrial Average have both fallen more than 7% from their respective peaks while the 10-year Treasury yield has reached an all-time low of 1.33%. The stock market decline is approaching “correction” territory, defined as a fall greater than 10%.
The coronavirus has been in news headlines for over a month, but this week’s surge of cases outside of China appears to be the main culprit behind the sharp market reaction. Today, the CDC warned that they expect a wider spread of the virus in the U.S. and are preparing for a potential pandemic. While there are still some scary unknowns about the virus, recent data gives reason to be hopeful that it will ultimately be contained. According to Worldometer, total active cases (the number of confirmed cases excluding those who have died or recovered) peaked about a week ago at 58,747 and have since been declining, with the latest tally down 15% since the peak. This gives us confidence that we are on the path toward containment.
Still, the shutdowns and quarantines aimed at containing the virus will undoubtedly have an economic impact. The longer it takes to contain the virus, the more significant this impact will be. Not surprisingly, travel-related stocks have dropped significantly alongside the headlines, but with the disease spreading globally—and with China now accounting for nearly a third of world GDP growth—reverberations are being felt in nearly every corner of the market. Of the S&P 500 company earnings calls that have been held thus far this year, 40% contained the word “coronavirus.” On February 17, Apple announced that it will not meet its revenue projections for the first quarter as the epidemic shut down its China plants and dampened demand in the region. Even Minnesota-based Hormel Foods cited the negative impact that the coronavirus outbreak could have on its 2020 earnings.
From a valuation standpoint, this week’s downturn has brought the S&P 500 forward price-to-earnings (P/E) ratio down from over 19x to about 18.1x. This is still higher than the 25-year average of around 16x forward earnings, but stocks now appear more reasonably priced than they did a week ago, especially if we believe the Fed will continue to remain accommodative with its monetary policy and that trade headwinds are abating. Do we think the market decline could turn into a correction? It’s possible. Do we think this is the start of the next recession? No. We are taking the recent pullback in valuation as a potential opportunity to deploy excess cash into the market.
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