The market wants to go higher. Investors, who continue to buy growth stocks, are ready for a bullish continuation.
Sadly, the coronavirus won’t let it happen.
Equities are taking another pause today after Japan reported two deaths from a cruise ship – the Diamond Princess – and South Korea told 2.5 million of its citizens to stay home.
Everyone’s sick and tired of hearing about the outbreak at this point, but the fact of the matter is that it’s still a major issue.
Infections are spreading outside of China, and until health officials can declare the coronavirus contained, it’s likely to keep a “lid” on the market.
That hasn’t stopped bulls from trying to push stocks higher, though. Just when another dip seems certain, the major indexes end up recovering to at or near their all-time highs.
And while setting new records is all well and good – especially in the early stages of what could be a global health crisis – Goldman Sachs says that investors might want to take a step back.
“In the nearer term […] we believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high,” wrote chief global equity strategist Peter Oppenheimer in a note to clients.
When SARS put China through the wringer in 2003, equities logged double-digit losses. Yes, they were temporary, but back then, China’s economy was roughly one-sixth the size that it is now.
Chinese tourism represents 0.4% of global gross domestic product (GDP). Currently, Chinese workers have missed enough days of work to equal a two-month unexpected break for the entire United States.
“During the fourth quarter, the five largest stocks in the S&P 500 (Facebook, Amazon, Apple, Microsoft, Google owner Alphabet) posted an average earnings surprise of +20%, compared with just 4% for the average S&P 500 company. Any weakness to these and other companies would likely push earnings estimates lower,” warned Oppenheimer, citing Apple’s recent downgrade of expected Q1 earnings.
JPMorgan quantitative strategist Marko Kolanovic shares a similar opinion and believes that a reckoning is coming for tech stocks, low-volatility stocks, and bonds – all of which have become “safe havens” during the coronavirus outbreak. Value stocks, which Kolanovic particularly likes for 2020, should see some more love once coronavirus fears fade.
“We caution investors that this bubble will likely collapse, i.e. this time is not ‘different,’ with valuations reverting closer to 2010-2020 average,” he said in a note.
And with the indexes trading lower today, that shift from growth to value could already be taking place. Tribeca Trade Group CEO Christian Fromhertz sees it as a potential selling point, even for the most fervent of bulls provided that more “bad news” hits the airwaves.
“This market is just moving on momentum and, at this point, it’s priced close to perfection,” he said.
“At this point, if we start seeing anything negative, it will probably force some people to start taking profits.”
Profits that many investors would want to “cash in” before a correction.
Especially if the coronavirus spreads internationally.
Something that, despite the World Health Organization’s best efforts, is already starting to happen.
