Ep.92- Coronavirus's Potential Impact on the Stock Market In 3 Stage
📸 IG handle: DollarSenseLA
STOCKS HAD THE WORST WEEK SINCE 2008
By now, we have probably all read or heard about the >10% drop in the stock market last week, which was the largest since the 2008 financial crisis. This time, it probably felt more tangible than ever for you, because you actually saw your 401k number go down quite a bit.
Here are 2 graphs to contextualize the scale of this drop, and where it had the deepest impact. In terms of scale, it is comparable to the Dot-com bubble burst in 2000, and it has significantly impacted the cruise ship, energy and travel industries. No surprises there really. Personally in the last 2 weeks, I’ve canceled 3 roundtrip flights between personal and work due to Coronavirus.
HOW THE STOCK MARKET COULD PLAY OUT FOR THE UPCOMING MONTHS IN 3 STAGES
What I am about to say below is entirely my personal opinion, an educated guess at best, definitely not professional advice. As far as I can see, the stock market is likely to get worse, in 3 distinct stages.
STAGE 1: SUDDEN CRASH IN THE BACKDROP OF PRE-EXISTING SKEPTICISM ON MARKET GROWTH SUSTAINABILITY (LATE FEBRUARY)
This stage is not a prediction as this has already happened. In the last week of February, the market suffered the worst week since 2008.
One thing you should know is that the stock market is not the actual economy. In fact, if the stock market fully reflected the actual economy, on average, we should all be 300% richer compared to 2010, because that’s how much the stock market has gone up since.
But we are NOT 300% richer. The fact there is such a large de-linearization between the stock market and the actual economy, is because the stock market is over-inflated (or in a bubble as some may call it). For this reason, many are already skeptical about how much more it can grow. When bad news, particularly the fear of coronavirus breaks, the pre-existing skepticism on the sustainability of the overall market becomes a convenient excuse for professional investors to overreact, contributing to a severe crash, which otherwise could’ve been smaller.
In layman’s terms, the sudden crash is analogous to a person who has already been on edge for weeks, and all of a sudden he is triggered by some really bad news, causing him a meltdown. In other words, coronavirus was the icing on the cake, which alone probably would not have caused such a big crash, had the stock market not been this irrationally high for years.
STAGE 2: A LOT OF TURBULENCE FED BY CONTRADICTING INFORMATION ( ALL OF MARCH )
In all of March, I believe there will be a lot of ups and downs in a turbulent fashion. In other words, I do not foresee a massive recovery or a massive selloff, yet.
The reason I believe so is that people will be confused with contradicting information during this time. Specifically, authorities such as the Federal Reserve and other State actors will try to present information (such as low death rate from Coronavirus) and insurance policies (such as the promise to lower interest rate) to calm the market. At the same time, the broken supply chain will begin to show up in everyday life for us to see with our own eyes.
For example, I already see a shortage of face masks and hand sanitizers in Los Angeles (probably nationwide at this point). That is just the beginning. As many companies begin to run out of inventory to sell and struggle to receive future supply from China, we may soon see a shortage of more things, such as Apple products, building materials for houses and etc.
Date: I took it on 2.29.2020 in Los Angeles
Date: I took it on 2.29.2020 in Los Angeles
In March, the average person will be confused by what they hear from authoritative figures and what they see in their own lives. I mean, how can you not be, when you hear the government tell you everything is fine, but there are no hand sanitizers to buy. As a result, people will stay put to wait for more information, which means the market will not change in a significant way. But this will change in Stage 3 when Q1 earnings are out.
STAGE 3: STOCK SELLOFF AFTER DISAPPOINTING EARNINGS DUE TO A BROKEN SUPPLY CHAIN (STARTING MID-APRIL)
Corporate earnings calls are the moment of truth that will move the stock market because they will provide a MEASURABLE number to materialize the individual experiences into a collective one.
There is no question about it that all corporations will have lower earnings due to Coronavirus, eve big tech such as Amazon and Google. Some may argue that Amazon could profit more because people will order online even more in an event of a lockdown. Yes, people will order more online, but their order won’t be fulfilled, because Amazon does not make the product. The actual products still come from China.
Others may also argue Google will also be fine, as it relies on advertising revenue, not selling physical goods from China. Not really, Google will not be fine, because the rest of the corporate world will struggle, hence slashing their digital advertising dollars to buy Google ads, in an event of a disease outbreak. History repeats itself, we can literally learn it from the case of AOL in 2000, whose earnings fell significantly because many of the companies that bought ads from AOL went out of business in 2000.
When the earnings calls provide the public disappointing numbers, it will inevitably cause a selloff, first from the bulge bracket professionals, then the individual investors like you and me. From there it may turn into a negative cycle (maybe a cyclone), possibly even leading to a tech bubble in the worst-case scenario. If that happens, it could mean death for any unprofitable unicorn, such as Blue Apron, Groupon, Peloton and more.
THE SILVER LINING
One person’s loss is another person’s gain. There are two big opportunities for any of us, if there is indeed a massive stock selloff.
First, it will drive down the mortgage rate even more. When people sell off stocks, they will try to find another safe place to park their money, usually bonds. When they do that, they will drive up the long-term bond price, hence driving down the bond yield. Generally, you can think about the directional movement of long term bond yield the same as the mortgage rate. Today (March 1st 2020), the mortgage rate on a 30-year fixed mortgage is 3.25%. I would not be surprised to see it getting down to 3.125% or even 3%.
Second, it could be a great chance to buy low, IF you have extra savings. Personally, I don’t time the market. However, for those who have the extra money to play with, when the market crashes, it could be a good time to buy low and hold it until the stocks recover, in the upcoming months or maybe years.