Stocks could fall even lower but history shows that the market typically recovers within six months. … [+]
Richard Drew/ASSOCIATED PRESS
Topline: Although coronavirus—and now an oil price war—continue to roil markets and undermine economic growth, not everyone is panicking: Some experts argue that recession fears are overblown despite the latest sell-offs, as the market historically tends to bounce back in the long-term.
- Coronavirus has taken a big toll on the U.S. stock market and economy in recent weeks: All three major indexes have undergone a correction and are now flirting with bear market territory, down by more than 15% from their most recent highs.
- Though many on Wall Street are trying to gauge the economic fallout from the coronavirus outbreak and now an oil price war, historical data suggests that the market will eventually bounce back from recent losses—even after stocks on Monday had their worst day since the financial crisis in 2008.
- Data from Bespoke Investment Group shows that there have been three other periods since 1990 where the S&P 500 has reached “off the charts” oversold levels (three standard deviations below its 50-day moving average): In October 2008, August 2011 and August 2015.
- While in all three cases, the S&P 500 hit new lows before moving higher, “the market eventually got back on track” over the next three and six month period—with the exception of 2008, when it returned to positive territory after a year.
- According to a report from JPMorgan Chase, the market has priced in too much of a worst-case scenario: Coordinated policy action from the Federal Reserve and U.S. government should help markets recover from the recent sell-offs and “ultimately outlast the outbreak,” the firm’s chief U.S. equity strategist, Dubravko Lakos-Bujas, said in a note on Tuesday.
- While there’s certainly been dramatic market volatility in the past few weeks, it presents “a great opportunity for stock-picking outside of the top 100 or so big-name companies that we talk about every week—as many valuations have become cheaper,” points out Charles Lemonides, chief investment officer at ValueWorks.
Crucial statistic: JPMorgan currently places its year-end price target for the S&P 500 at 3,400—implying that the firm sees around an 18% upside from the index’s current level today. “The speed and intensity of the sell-off has shaken investor confidence with many now modeling recession scenarios even though there is still significant lack of clarity on the actual fundamental impact,” Lakos-Bujas said in his note.
Crucial quotes: Mohamed El-Erian, chief economic adviser at Allianz, wrote in the Financial Times on Monday that the feared impact of the coronavirus is “destroying supply and demand simultaneously,” while the recent launch of an oil price war is further putting pressure on the global economy. He argues that a coordinated “whole of government” approach with “true productivity-enhancing reforms” would effectively stem financial losses, rather than continuing to over-rely on central banks.
Tangent: “There’s very dramatic value to be found in secondary and tertiary names—it’s a good time to be confident when putting money to work,” says Lemonides. He identifies several stocks in particular that are really well-priced right now compared to a couple of weeks ago: Goldman Sachs, Invesco and United Natural Foods. “Position your portfolio through this maelstrom to the other side of it,” he recommends.
Key background: Investors have struggled to judge the economic impact of the fast-spreading coronavirus, especially now that it has started to hit the U.S.—with over 750 infected and 26 dead. Making matters worse is an oil price war that broke out between Saudi Arabia and Russia over the weekend, further fueling fears of a global economic recession. Monday’s historical sell-off saw the Dow and S&P 500 both plunge almost 8% for their worst day since 2008. Oil also fell around 25%—its biggest one-day decline in prices since the Gulf War in 1991.