U.S. stocks are falling at a record-setting pace—a blindingly quick drop that has several market strategists saying it is time to buy.
Thursday, all three of the main U.S. indexes were down at least 10% from their record highs on Feb. 19—six trading days ago. If the losses hold through the close, the S&P 500 and Nasdaq Composite will each have had their quickest decline into correction territory from a record close ever, according to Dow Jones Market Data.
The reason, obviously, is the coronavirus outbreak. It is anyone’s guess how far and wide the virus—referred to as Covid-19—spreads before authorities are able to control it. And beyond the human cost, it is undeniable that the epidemic is already having a negative economic impact. Closures of factories and public places such as shopping areas hit both supply and demand.
But for investors with a long time horizon, this too shall pass. Economist Ed Yardeni counts 65 previous market “panic attacks” this bull cycle, each of which was followed by a rebound to new highs. The current selloff could become the 66th, if the Covid-19 disruption is under control in a matter of months, he says.
Daily new cases in China have been steadily declining. Global health officials in other countries are taking it seriously, and the underlying economic conditions in the U.S. seem strong enough to withstand a short-term hit.
“U.S. economic fundamentals are on a solid footing,” wrote Mark Haefele, global chief investment officer of UBS Global Wealth Management, on Thursday. “Interest rates and inflation are low, labor markets are healthy, consumer balance sheets are solid, and banks continue to be willing to lend. In other words, we are not seeing the typical conditions that would spark a recession.”
The pace of the decline has several technical and fundamental measures flashing “buy.” At the very least, the risks and potential rewards are more evenly balanced than a week ago—markets can’t keep falling forever.
“The market is now discounting some of the bad news, valuations have reset, and many technical indicators are stretched to the downside,” Keith Lerner, chief market strategist at SunTrust Advisory Services, wrote on Thursday.
As investors have fled equities, they have piled into haven assets like U.S. Treasuries. That has led to a plunge in yields, which fall when the price of a bond rises and help determine the cost of mortgages.
It has also helped make stocks appear more attractive.
“With the sharp decline in rates, 63% of stocks in the S&P 500 now have a dividend yield above that of the 10-year U.S. Treasury yield versus a 30-year average of 18%,” Lerner wrote. “This should help to provide a cushion for the market.”
And should the Covid-19 uncertainty compel makers of economic policy around the world to respond with stimulus such as government spending or interest-rate cuts, the net effect could end up positive for markets after the outbreak recedes.
“While it is easy to turn cautious on the market after a ~10% drop, we argue investors should not discount the benefit of announced and unannounced global policy responses that are likely to outlast the impact of Covid-19,” J.P. Morgan chief U.S. equity strategist Dubravko Lakos-Bujas wrote on Thursday.
“For instance, potential Fed insurance cuts at a time when the U.S. employment base is close to full and prime-age participation rate is on a rise could result in an even hotter economy once the Covid-19 impact rolls off and stimulus remains.”
Lakos-Bujas lowered his forecast for aggregate 2020 S&P 500 earnings per share by about $6, to $174.10. He sees coronavirus taking a $4 bite out of earnings. The possibility that the benefits from reduced tensions over trade between China and the U.S. might not emerge until the second half of the year accounts for the remaining $2.
The strategist sees that all as just a one-time hit to earnings. As a result, he is leaving his year-end price target for the S&P 500 unchanged at 3400. The index had topped 3386 on Feb. 19, before plummeting to about 3045 on Thursday afternoon.
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