Our Experts Weigh In On The Market Selloff
In case you’ve been living under a rock, the market is reeling from coronavirus. As the outbreak crossed borders and public health officials race to combat the effects, it’s clear that this whole situation will have an economic impact. The question is how much, and for how long.
In just a moment, I’m going to offer a rare glance at what three of our expert analysts are telling their subscribers. And while your situation may be different, the aim is that you’ll find something that’s both actionable and helps you keep a level head in this environment.
But first, let me offer some perspective. U.S. GDP grew at an annual rate of 2.1% in the fourth quarter. That’s the 23rd straight quarter of growth. And you know what the markets have done – it’s been one hell of a run.
So will coronavirus be the end of the party? Or is this just a healthy correction? It’s just too early to tell. What we do know is that while you can’t necessarily trust their official numbers, China’s economy will most certainly take it on the chin. Plus, analysts at Goldman Sachs have issued a warning, saying that U.S. earnings growth could end up flat for 2020, due to the outbreak.
Let’s hand things over to Nathan Slaughter, Chief Investment Strategist of High-Yield Investing to kick things off…
Ouch. What else can you say about the painful wounds being inflicted on the market right now? It’s not often you can refer to a triple-digit loss in the Dow as a “good day.” Yet, Tuesday’s decline of 124 points was its best performance of the week.
To call this selloff epic is a bit of an understatement. Historic is more fitting. Since February 19, the Dow has retreated by 3,500 points. That doesn’t count today’s trading – right out of the gate, the Dow has surrendered another 500 points. Actually, make that 600 now.
Small caps and tech stocks are being hit even harder.
All of the major market indexes have fallen more than 10% from their recent peaks, the technical definition of a correction. This is the fastest such pullback in history. Most corrections take a few months – this one, just six trading sessions.
Even before today’s opening bell, the market was on track for its worst week since the financial crisis in October 2008.
This is a different kind of crisis altogether. The blame for this unrelenting selling can be pinned squarely on the coronavirus. For months, investors cast a wary eye on the infectious disease, but kept their cool and didn’t panic.
What has changed? Perhaps news from concerned health agencies that the number of new cases outside China has eclipsed those inside China for the first time. Translation: efforts to contain the virus have failed. As of this writing, the Covid-19 outbreak has spread to 47 countries, infecting 82,5000 and killing nearly 3,000.
Those numbers seem to climb by the hour.
The Economic Implications
It has become increasingly clear that the coronavirus has begun to seriously curtail economic activity. Damage that was once confined to the travel industry has spilled over into the broader markets, from supply chain disruptions to canceled exports. Shippers, manufacturers, oil producers… just about everyone is in the path of the storm.
Companies from Microsoft (Nasdaq: MSFT) to Anheuser Busch (NYSE: BUD) have already lowered their sales and earnings forecasts, citing the coronavirus. I believe this is just the beginning of a wave of negative pre-announcements.
Goldman Sachs just warned that S&P earnings growth may completely flatline in 2020. Former Federal Reserve chief Janet Yellen even used the dreaded “R” word (recession).
Good luck finding a stock in the green right now. I saw just one on my screen yesterday. Tonix Pharmaceuticals (Nasdaq: TNXP) soared more than 100% on news that the company is making progress on a potential vaccine.
The silver lining – if there is one – is that equities were arguably overheated and probably needed to let off some steam. Still, it’s never easy to see $6 trillion in global market cap erased in a little over a week. Outside of U.S. Treasuries, there aren’t many safe harbors.
A coordinated flight to safety has driven yields on the 10-year note to a record low 1.20%.
Action To Take
I wish I could say that the worst is over. But the hard truth is, we might still be in the early innings. While infection rates have slowed in China, new cases are multiplying elsewhere.
That doesn’t mean we should panic. Selling on emotion is rarely a good plan. In fact, when the panic starts to subside and we can attach preliminary figures to the financial fallout, I will be opportunistically buying. This is a great time to build a wish list of potential buys that were maybe a bit overvalued and out of reach previously.
I’ve already got a few names in mind. When the time is right, we’ll need dry powder to go hunting for quality, oversold companies whose yields are shooting higher. I plan to raise my cash position to between 10% and 15%. With that in mind, I am selling three of my more vulnerable holdings, Schlumberger (NYSE: SLB), Triton (NYSE: TRTN) and BR Energy & Resources (NYSE: BGR).
They aren’t showing any alarming red flags. But energy and transportation are both under siege right now and may take longer to recover. Hopefully, some sanity will return to the markets next week.
Editor’s Note: For those of you who dabble in options, here’s what Amber Hestla had to say to her premium readers over at Income Trader.
The market panicked today. And that’s exactly why today is not the day to close out our trades.
You can truly say that this week’s market events have been unprecedented. The 10% decline in the S&P 500 over just six days is the fastest on record.
That’s important for us to acknowledge because rapid declines affect options prices.
During a decline, fear rises, and buyers rush into put options, generally overpaying. The prices on puts today are disconnected from normal market activity. That’s because the market action in the past week hasn’t been normal. However, the decline is likely to slow. That will reduce the volatility premium in options, and that will lead to a sharp reversal in options prices.
Current prices do not reflect anything except a panic. And a panic is unlikely to last three more weeks (when our options will expire). As the panic subsides, so will the volatility premium. At that point, we can profit in these positions, or we can close them for better prices than we see now. Either way, today is the worst day we could choose to close.
Action To Take
While the panic could continue a few more days, these options are all worth holding for now. As always, I will be watching the market — as well as our Income Trader portfolio — very closely. If anything about my outlook changes, you’ll be the first to know.
Editor’s Note: And finally, let’s wrap things up with Jimmy Butts, who sent this note to Maximum Profit subscribers this morning.
Just six days ago, the S&P 500 was trading at record highs. Now we are officially in correction territory, as it’s slid more than 10%. The six-day rout is the quickest in history (from record highs to correction territory).
The market is poised for its worst week since 2008. But that doesn’t mean we are going to witness another financial crisis…
The plunge in stocks is due to rising concerns over the coronavirus, which has now infected more than 82,000 folks around the globe. Many large corporations have already stated that they won’t hit sales guidance due to the virus, which has further exacerbated problems for the stock plunge.
I believe this to be a short-term correction, which is why I’m increasing my trailing stop loss for all stocks to 20%. I will continue to monitor the relative strength ratings and utilize that indicator as my primary sell signal. But I don’t want to get bucked out of all my holdings from this correction, which I believe will be short-lived.
Action to Take
Increase the trailing stop losses of all holdings to 20%. Should any of our holdings fall below our new 20% trailing stop loss, sell the next trading day. I will continue to monitor the relative strength rating. If any fall below 70, I will issue an immediate “Sell” alert.
So there you have it. Each of our analysts have weighed in one way or another, with more to come. Keep in mind, if you are not a subscriber to one of these respective publications, this advice may not apply to your specific situation. But I want to get it out there for you to make your own decisions.
I’m going to leave you with my two cents. Sure, I may put in a couple stop-losses on a few positions, but overall I’m holding fast right now. Corrections are a sign of normal, functioning, healthy markets. Also, to echo Nathan’s advice, I’m starting a shopping list this weekend for quality stocks I can buy on the dip. This is why the greats like Buffett pile up cash in the good times – so they can be opportunistic when things turn sour. That’s what I’m doing, too.
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