Stocks sold off hard Monday, as the coronavirus spread globally, one of the market’s biggest fears. But Wall Street has two main messages for investors, messages that are supportive of stocks.
The S&P 500 fell 3.27%, with the other two major U.S. indexes both solidly in the red for the day. The virus has now spread to 28 different countries. In Italy, there are 219 reported cases. Many areas of Italy are quarantined. The virus is also now in Asian countries outside of China.
U.S. importers have been largely 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. If they can’t import, they won’t meet demand. Also, U.S. companies with significant revenue exposure to China will be impacted.
Still, many bears on Wall Street say the earnings multiples are too high, now at roughly 18 times on a forward 12 months basis and well above the 10 year average of 15. But the average stock on the S&P 500 was at 19 times forward earnings last week, so if the market looks past the virus, stocks could return to their prior levels.
Wall Street’s two main messages:
Buy the Dip
“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 investors to consider buying more growth tech stocks, which were hit hard Monday and are not directly exposed to economic changes.
"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.”
Watch For Stimulus
“If Europe and/or North American nations were to replicate the aggressive containment measures employed in China, it could mean materially lower economic growth in the first half of the year, and require offsetting actions from monetary and fiscal authorities to prevent a prolonged downturn,” wrote UBS Chief Investment Officer of Global Wealth Management Mark Haefele in a note.
According to CME Group data, there’s a 23% chance of a Federal Reserve inters rate cut soon, up from 12% last week. The 10 year treasury is now yielding 1.3% and inverted to the 3 month yield of 1.54%.