Looking for buying opportunities in the wreckage of today’s coronavirus selloff? Analysts say banks could be picks if the yield curve soon expands, and some growth-tech stocks are at attractive entry points. Many of those stocks aren’t significantly vulnerable to the coronavirus’s economic impact.
Global stocks are selling off, with U.S. equities hammered along with Europe and Asia as investors are concerned about the virus’s effect on manufacturing supply chains everywhere.
The S&P 500 fell 3.41%, with the Dow Jones Industrial Average down 3.35% and the Nasdaq down 3.57%.
U.S. importers have been insulated from the economic impact, as they’ve relied on extra inventory. But if they run out, they’ll need to import from China (and the rest of the world) sooner than anticipated. And if they can’t import, they won’t meet demand.
Also, U.S. companies with significant revenue exposure to China will be hurt. The Purchasing Managers Index for February hit 49 as manufacturers stalled production. A reading below 50 is a year-over-year contraction.
For U.S. stocks broadly, many strategists advised investors to buy the dip after the 3% drop in the S&P 500 from Jan. 17 through 31. And investors did, as the spread of the virus looked to be easing, potentially creating favorable revenue-and-earnings comparisons for 2021 against 2020.
On Monday, the market tanked as the virus seems to have spread to Italy and some Asian countries beyond China.
“I think it could be a buy-the-dip opportunity,” Tim Chubb, chief investment officer at Girard Partners, told TheStreet. He says the market could fall further from here -- but he still advises short-term investors to consider buying more banks stocks and longer-term investors should go for growth tech.
“Don’t let short-term concerns cloud your long-term thinking and prompt you into knee-jerk reactions,” said Greg McBride, chief financial analyst for Bankrate.com. “If you’ve been waiting for a better buying opportunity, the stock market is 3% cheaper today than it was Friday.”
“The trillion-dollar question is whether or not the drop in global economic activity will cause the U.S. to go into recession, because anything short of that outcome will prove to be a buying opportunity in the stock market,” said Chris Zacarelli, chief investment officer for Independent Advisor Alliance.
“We will move past the challenge, and the economic expansion will continue in 2020.”
The banks were a mess today.
Notable decliners include Bank of America, Citigroup, JPMorgan, Citizens Financial and Fifth-Third Bancorp, down 4.5%, 4.3%, 2.4%, 3.6% and 3%, respectively.
Investors have rushed to the relative safety of Treasury securities as the global economy slows. Yields on the 10-year (1.3%) and three-month (1.54%) treasury securities are now inverted. That’s a major negative for bank stocks, especially for those that derive a significant amount of their revenue from lending.
Banks could still be a pick in the short term as the yield curve could expand considerably when the virus is stomped out and economic activity resumes, Chubb says.
But that window of opportunity won’t be open for long as the “new normal” economic environment features a compressed yield curve, making banks not an attractive overweight to portfolios.
Growth tech stocks, large and small, also sold off sharply on Monday. That tends to happen in steep U.S. declines because mutual funds and ETFs indexed to the broader market must overweight the FAANG stocks and big tech, as those stocks have outsized market capitalizations. So when the market sells off, those funds must sell those stocks.
Facebook, Apple, Amazon, Netflix, Google and Microsoft fell 4.3%, 3.6%, 3.8%, 2.3%, 3.9% and 3%, respectively. Microsoft was down more than 4% at one point.
Apple is quite exposed to the impact of the coronavirus, as almost all of its devices are made in China and the Cupertino, Calif., tech giant derives roughly 20% of iPhone revenue from that country.
But the company has already said it would miss its revenue estimate for the March quarter. Many analysts also expect device sales that were forecast for the quarter to be pushed back a few quarters. The stock is down 7% from its all-time high of $324 a share, which it hit in early February.
Other tech stocks that aren’t as prevalent in indexed funds, but that also aren’t directly exposed to economic changes, also sold off.
Salesforce, Twillio and Workday fell 2.2%, 4.8% and 3.9%, receptively.
“It could be a great buying opportunity for some of these business that are riding the secular growth opportunity like the cloud,” Chubb said.
He agrees with many that software-as a-service is one business that will benefit from a huge shift in data-related spending from businesses, governments and individuals over the next five-plus years.
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