02 Mar Capital 19 Catch-Up
Markets Enter Correction Territory on Mounting Corona Virus Fears
Well, it’s official. The U.S. stock market is in correction (along with the major global stock market indexes). The downward momentum caused by fears of the COVID-19 (coronavirus) outbreak becoming a global pandemic has only built up as the week has progressed.
On February 19, the S&P 500 index closed at an all-time high of 3,386.15. As of the close on Friday, February 28th, the large-cap index was more than 12% off its high (a correction is technically defined as a decline of 10% or more from a recent peak).
The six trading days it took the S&P 500 to go from an all-time high to entering correction territory was the fastest trip in market history, according to Dow Jones Market Data. It’s one thing to look at broad market indexes but looking at the breadth of the overall stock universe is perhaps even more telling of the current mood. 93% of all exchange listed stocks were down at least 10% from their 52 week high. 66% of them are down at least 25% and 22% are down 50% from their high of last year.
Obviously the market is worried about the long term impact of coronavirus. Traders are making decisions based on fear. But I recommend that investors try and maintain a sense of perspective. The decline in stocks this week was a function of panic selling over fears of what could happen rather than what is happening.
With all the recent news it is easy to forget that recent earnings came in pretty strong verses expectations with more than 65% of reports beating earnings and more than 62% beating sales expectations. Both of which are stronger than the historical average.
It is difficult to sit through these periods but when they come along I like to take to heart what Warren Buffett said at the Berkshire Hathaway shareholder meeting in May 2008:
“If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Of course, the caveat is that you’ve invested in good companies that will bounce back, but such declines offer an opportunity to buy them more cheaply.
So what is next? It is likely we could see more selling in the weeks to come. Cases of the virus have increased outside China but countries are imploring people to keep calm and carry on. Unless we see large scale shut downs in developed nations this recent bought of selling will pass. Companies will continue to grow and make profits and stock prices will recover. For most stocks nothing has changed in their business model today relative to last week. However, you now have the opportunity to buy that same business at a lower price.
If you have already sold any shares, then you need to pay close attention and be ready to buy them back swiftly if things start to change. If you are still holding then I would recommend you continue to hold. Selling now would be akin to closing the barn door after the horse has escaped.
If you want to start looking at ways to profit from the virus then the biotech sector offers opportunities.
Moderna Inc (MRNA) owns the most notable experimental coronavirus vaccine. The stock soared more than 40% last week after the company said they have sent the first batch of a vaccine to U.S. government researchers. They expect to begin a clinical study in April with results available around July. That would be a stunning turnaround time in the world of vaccine development
Another biotech company, Altimmune (ALT) is studying potential coronavirus vaccines. That stock jumped 110% on Friday after the company said it was preparing to begin animal studies of a vaccine.
Finally there is Gilead Sciences (GILD). Gildead is testing remdesivr in China. The biotech company gained FDA approval to test the Ebola virus treatment in two Phase 3 studies of 1000 patients at medical centres around the world. Those studies will begin in March
As you can see the response time from the biotech sector has been impressive and is another reason we are confident the markets will recover and move higher. Probably much faster than anyone suspects