Coronavirus Selloff Is Called Overdone — Here’s How Investors Can Take Advantage

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The U.S. equity selloff is excessive, according to many market participants and observers. Moreover, investors have a number of ways to benefit from the drop.

All three major U.S. stock indexes fell at least 1.5% on Monday, extending the 1% decline from the four trading days last week.

“Definitely, this seems a little bit overdone right now,” Shawn Cruz, trading manager at TD Ameritrade, told TheStreet. "This may be an interesting buying opportunity.”

“The bottom line is investors are taking a sell-first-and-ask-questions-later approach right now,” wrote Ryan Detrick, senior market strategist for LPL Financial, in emailed remarks to TheStreet.

The selloff “should not be that bad, especially here in the U.S.,” wrote Brad McMillan, chief investment officer for Commonwealth Financial Network, in a note.

Simply put, the backdrop for U.S. stocks is favorable, contrary to the market’s behavior. One phrase many strategists used Monday was “buying opportunity.”

Wall Street also notes that the U.S. has reported only a handful of cases of the coronavirus, which is ravaging China. While the Chinese economy may see worse-than-expected economic data, as consumers stay home, U.S. consumer spending won’t necessarily be affected.

In addition, a look at the SARS outbreak in February 2003 supports the current “buy-the-dip” consensus.

“While we remain alert for a further increase in its severity, we expect the outbreak’s impact on the region’s economy and risk assets to be short-lived, in part based on evidence from the past,” wrote UBS’s Mark Haefele, chief investment officer of global wealth management, in a note.

The SARS outbreak saw the S&P 500 fall 5.7% from Jan. 1 to mid-February. The index then rebounded to its Jan. 1 level by April.

Cruz and Haefele agree that based on the SARS precedent, the coronavirus outbreak should turn out to be contained, which means limited downside for the Chinese economy.

At the same time, China-exposed companies like Starbucks SBUX and McDonald’s MCD on Monday saw their shares fall 3.11% and 0.8%, respectively.

Starbucks sees substantial growth among Chinese consumers, whose taste for coffee is growing. Starbucks may have closed stores in China, and store openings in the region – a central part of its overall growth strategy – may be at some risk.

Cruz also sees big tech earnings as a potential plug to stop the stock-market drain: “I expect markets to refocus on the earnings that are coming out.”

He mentioned Apple AAPL and Microsoft MSFT, which report earnings soon. Facebook FB and Alphabet’s Google GOOGL are also soon to report. This group accounts for a huge portion of the S&P 500. Should those reports provide positives for investors, holders of S&P 500 index funds should benefit.

On the negative side, United Airlines UAL and Delta Air Lines DAL saw their shares fall 5.21% and 3.37% on Monday. Until the coronavirus situation stabilizes, travel is likely to fall sharply and revenue and earnings for the carriers in 2020 may be revised downward.

But Cruz advises that while for longer-term investors “this is going to cause a hiccup in 2020,” it’s also “a good time for long term investors to find opportunity.”

If these companies and the analysts that follow them revise their numbers down for 2020 and the outbreak is contained, 2021 should see favorable comparisons against 2020, creating a case to buy these stocks on their dips now or soon.

The selloff comes amid calls from several strategists that the U.S. should see a corruption or pullback. That’s because forward-earnings multiples were recently near 19 times late in the economic cycle. They’re now around 18 times.

Those bearish investors recognize that the market would likely resume rising after a near-term pullback.

Bottom Line: If the coronavirus situation plays out as SARS did, this could be a clear buy-the-dip moment.