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Coronavirus reality bites, with Dow down over 1,000 points!

Peter Switzer
25 February 2020

The Coronavirus has become a “reality bites” event, with the Dow dropping over 1,000 points overnight! And while that does sound huge and it is, the fact that the US stock market has surged so much in recent years means that it’s still only a 3.5% drop. We’ve been through these situations before on the way up for stock market indices.

The only difference you can’t easily not worry about is that central banks across the world don’t have enough interest rate cuts left up their sleeves to help economic growth. And debt levels are globally very high, so the best economic panacea will be a first-world medical treatment of the Coronavirus that stems its infectious spread.

The current spooking of stock markets, with European markets down 3.3% to 5.4%, comes as the virus spreads in Italy. While the threat was primarily in China, the world economic and stock market views were that this will hurt but will be manageable. But now that comfort factor has gone out the window and uncertainty has taken over.

When that happens, yep, stocks fall. Today, my job is to work out how much you should worry. We answered that question on my TV show last night with market experts Michael McCarthy of CMC Markets, Julia Lee of Burman Invest, Charlie Aitken of Aitken Investment Management and our own Paul Rickard of the Switzer Report. I also interviewed the MD of Webjet, John Gusic, who said he expected the Coronavirus to hurt his share price, despite the company recently reporting better than expected.

You can watch the show here.

So what happened such that the US stock market has given up pretty well all this year’s gains? It’s pretty simple and is all based on the unverifiable speculation that the spread of the virus outside China, especially to Italy and South Korea, will result in a bigger fall in global economic growth.

For an export-oriented country such as Australia, it explains why our stock market fell 2.2% yesterday — but it’s going to do the same and even more today. Our dependence on China’s demand for our goods and its supply of key products was always going to leave us more vulnerable to the virus but the irony is that the number of cases and deaths in China is waning. Hopefully, the worst is behind China. Now we have to worry about the rest of the world and keep our fingers crossed that first-world medical processes can deal with this damn virus better than China did. Until we see that happen, stocks will be under pressure.

Regular readers know I’ve been surprised we hadn’t had a COVID 19 pullback, given how high stocks have spiked over 2019. In fact, we explained on the Switzer TV Investing programme two weeks ago, via Michael McCarthy, that you could have bought a put option, which is like insurance, for $17,000 to protect 95% of a million dollar portfolio of stocks. That would be more expensive today!

So what does today’s stock market carnage tell us? Take the following on board:

  • This is the biggest percentage drop in the S&P 500 since October 2018 when trade war and interest rate rises scared the stock market.
  • A correction of 10% plus for stocks is on the cards but most stock markets, including our own, have been in record high territory.
  • The bond market again is predicting that the Coronavirus could bring in a recession but it often makes this forecast.
  • The oil price was down over 5%.
  • Goldman Sachs cut the US first quarter economic growth forecast from 1.4% to 1.2%, with supply disruptions set to be a big issue.
  • Legendary investor Warren Buffett says this has to slow the US economy down but also sees the usual over-the-top stock market reaction means buying opportunities for long-term investors will emerge out of this current drama.

The world will now watch the numbers of infections and deaths in Italy and South Korea, while hoping that other European countries will be able to contain the virus. But open borders in the EU is another worry factor for stock markets.

This is just another obstacle for investors to manage on the wall of worry that stock markets climb. In Europe, tourism-related businesses copped it, with EasyJet’s share price down a whopping 16.5% and Ryanair off 13%.

Given the potential economic fallout, anyone hoping that our Reserve Bank would stop cutting interest rates is going to be sadly disappointed. Not only will the RBA cut rates again, the Treasurer will be pushing back the arrival time of his beloved Budget Surplus.

History suggests that the stock market sell offs will get worse before I’d have the guts to say it is time to be a buyer again. Watch this space.

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