“Keep calm.” That’s my advice as the media and doomsday merchants ‘celebrate’ the Armageddon some have been praying for. I’m praying for a quicker-than-expected solution to the Coronavirus but I’m not sure what my brownie points are like with the power above.
Three hours before the close of trade and the ‘elevator’ that is taking down stocks at an uncomfortable rate, after shares ‘climbed the stairs’ much more slowly over 2019, was slowing down. This means buyers are starting to cherry pick oversold companies. But ultimately it’s going to be medical stats, not economic or earnings numbers that will dominate stock prices over the next few weeks.
It might be timely to steal and rework a line or two from one of my favourite pieces of prose, called “If” by Rudyard Kipling.
“If you can keep your head when all about you are losing theirs…
If you can trust yourself and your investments when all men doubt you…
Yours is the earth and everything that’s in it, and – which is more – you’ll be a mature investor, my friend!”
Right now, stock prices are falling on “What if?” but that will eventually give way to “what is” and “what will be.”
That’s why I say “keep calm”.
To help you keep your head, have a look at this chart I showed my followers on Switzer Daily on Thursday.
This shows how markets dive and recover from major viruses. Overreaction happens in this phase and great companies get trashed because some sellers have to sell but you should have a portfolio that is good for delivering income, so you should be able to ride out the troubled times.
In fact, I know three days ago, I checked out my cash balance in my SMSF and was happy that I had a decent war chest to be a buyer in the not-too-distant future. That said, I don’t know when that buying opportunity will come but we will be watching. On my spot with Alan Jones on 2GB, 4BC and 2CC on Friday, Alan asked if this was a “buying opportunity” and I quickly joined in with “not yet.”
I’m no expert on the repair job for this damn virus but as soon as the consensus says the good guys are winning, the stock market will rebound. Our PM is lining up for fiscal stimulus and the Chinese are already pumping it into its embattled economy.
It’s a waiting game. And while economic growth will be hit, there is bound to be an economic comeback in the second half of 2020 and stock markets buy on future earnings.
They’re selling now because the earnings of the March to June quarters will be affected and the share prices of the past six months no longer match what former expectations were saying to us. That was then, this is now. And that’s why share prices are falling.
Lots of debt, very low interest rates and a big budget deficit in the USA could create problems but provided the Coronavirus doesn’t shock and awe us and become bigger than Ben Hur, then we should see a bounce-back within four months or so, if other corrections are any guide. The rebound in stock prices should start before then but to get back to the old highs, it could take four to six months.
But as I have to add – I’m not an expert on the Coronavirus, however, my chart above indicates that eventually stock prices do defy gravity.
So let’s get the key news from overnight after a week when just about all markets have gone into correction mode, down over 10%. With over two hours to the close and the S&P 500 was down 2%. How the market winds up from that point will partly determine how we open on Monday.
The other part will be figures on infections and deaths in Europe but Africa could be a curve ball that few might have worried about. These many questions explain why the bond market is so panicky and it’s telling us that rate cuts are coming in the US.
The benchmark U.S. 10-year Treasury yield touched a fresh record low overnight at 1.16% and Goldman Sachs sees three cuts in the US this year and no earnings growth for listed companies, explaining why stocks prices are plummeting.
And computing trading is making it all worse.
“The reason it happened so quickly is because the momentum going up was so great,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “The hedge funds, the algorithmic trading, the quants: They play on momentum.”
Looking at the week for stocks at home and it was the worst week since the GFC and this was one of the fastest falls ever. The S&P/ASX 200 Index gave up 697.8 points (or 9.8%), finishing at 6441.2. As my media mates love to tell us, the action wiped $209 billion off the value of stocks.
Of course, as we put on close to 20% over 2019, we would have wiped on over $400 billion, so let’s keep it all in perspective. This erratic and speculative reactions of stock markets is why many investors prefer property because price movements aren’t always in your face and so damn scary at times.
Mining stocks were bashed, with BHP off 12.1%, Rio 10.8% and Fortescue down 10.8%. As predicted by its MD, John Gusic on my Switzer TV Investing program on Monday night, Webjet copped a Coronavirus attack but even he would’ve been surprised at the 29.24% stock price slide. In the fullness of time, this will look like an overreaction.
The banks also felt it, as rate cut speculation is never great for these businesses. CBA lost 8.1% to $81.65, Westpac dropped 8.2% to $23.70, ANZ fell 9.3% to $24.70 and NAB gave up 8.2% to $25.17.
Even Macquarie was a big loser, down 11.3% to $134.24 and AMP dropped 18.7% to $1.67.
And for those wanting to be a CSL shareholder, the latest price is $308 after its 8.4% fall, but since its recent all-time high of $341 is 9.6%.
Our WAAAX stocks also were singled out for attention, with Afterpay down 16.3%, Altium 10.6%, Appen 18.1% and Xero 15.7%. Wisetech had a shocker, off 21% and the AFR says J Capital doesn’t believe the company’s argument that the virus has “messed” with their results.
The company will have to address this controversy or its share price will remain under pressure.
Bigger riser of the week was Invocare, up 9.02% but of course it is in the funeral business! I don’t need to say anymore.
What I liked
- Private sector credit (effectively outstanding loans) rose by 0.3% in January, after rising 0.2% in December. Annual credit growth rose from a 9½-year low of 2.4% to 2.5%.
- The fifth estimate of spending in 2019/20 was $120.3 billion, up 2.8% on the fourth estimate and 2.1% higher than the fifth estimate for 2018/19. The first estimate for investment in 2020/21 was up by 8.8% on a year ago, well ahead of the 1.2% average increase over the past decade.
- The US economy (as measured by GDP) grew at a 2.1% annual rate in the December quarter, in line with forecasts.
- New home sales in the US rose by 7.9% in January to a 764,000 annual rate (forecast 710,000) – a 12½-year high.
- Pending US home sales rose by 5.2% in January (forecast 2.2%).
- The Chicago Federal Reserve national activity index rose from minus 0.51 to minus 0.25 points in January (forecast minus 0.92 points). The Chicago Federal Reserve manufacturing index rose from minus 0.2 points to 1.2 points in February (forecast 11.8 points).
What I didn’t like
- Every story with the words Coronavirus and COVID-19 in it!
- New business investment (spending on buildings and equipment) fell by 2.8% in the December quarter (consensus 0.5%) to be down by 5.8% over the year.
- Construction work done fell by 3% in the December quarter – the fifth fall in six quarters. The value of construction work done is down by 7.4% on a year ago.
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.7% to 108.3 points – the second biggest decline in 2020. Sentiment is below both the average of 114.1 points held since 2014 and the longer-term average of 113.1 points since 1990.
- Consumer views on family finances compared with last year (‘current finances’) fell by 4% to 4.3 points – the lowest level since 9 June 2019.
The dividend lesson
With the challenging stock market conditions, more companies are issuing dividends. Last Monday, we learnt from CommSec that a record 92.6% of the companies reporting interim earnings have issued a dividend. This compares to an average 86% over the past 20 reporting seasons. Unless you’re going to become a market timer and go to cash in one big trade and get back in like a trader, you should be asking: “How good is my portfolio for paying dividends?”
Stock prices will always fall faster than dividends and as we get towards the end of the bull market, shifting your investments towards more reliable income makes sense.
And if you still need perking up, billionaire Ken Langone, the co-founder of Home Depot in the US, told CNBC viewers: “Don’t let your emotions run away with you. Don’t give up on America and don’t give up on the world. It’s not that time. Months from now, this week’s market plunge is going to look like a great buying opportunity.” Go Ken!
NEWS FLASH!
With 90 minutes before the close, the Fed boss Jerome Powell, pointed to the strong US economy but firmly hinted that a rate cut would be coming, if needed. And Bank of America suggested it was possible that the Fed’s first cut would be 50 basis points and the Dow Jones had an instantaneous positive reaction to this news.
The week in review:
- Peter Switzer reflects back on how his previous stock recommendations have fared in How are our “10 stocks for 10 years” faring? [1]
- Paul Rickard divulges his love of “boring stocks” like Medibank Private in Is Medibank Private a buy right now? [2]
- Charlie Aitken asks Should you put some of your stored cash to work during this market correction? [3]
- James Dunn looks at Who’s reporting this week [4].
- Tony Featherstone wants to avoid stocks in tourism, travel or education but offers his thoughts on 3 ways to play an eventual market rebound [5].
- Michael McCarthy offers specific industries he recommends looking into for My “Hot” stock [6]
- Rudi Filapel-Vandyck shares what’s in the good books & bad books in Buy, Hold, Sell – What the Brokers Say. [7]
- Paul Rickard answer questions on protecting your portfolio, Speedcast & bringing dependents into your SMSF in Questions of the Week. [8]
On our YouTube channel this week:
- SwitzerTV Property: Home loan arrears – should we be worried? [9]
- SwitzerTV Investing: The Coronavirus has shocked stocks – where are the buying opportunities? [10]
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday March 2 – CoreLogic home prices (February)
Monday March 2 – CBA & AiGroup indexes (February)
Monday March 2 – Business indicators (December quarter)
Tuesday March 3 – Government finance (December quarter)
Tuesday March 3 – Reserve Bank Board meting
Tuesday March 3 – Building approvals (January)
Tuesday March 3 – Balance of Payments (December quarter)
Wednesday March 4 – Economic growth (December quarter)
Wednesday March 4 – New car sales (February)
Thursday March 5 – International trade (January)
Friday March 6 – Retail trade (January)
Overseas
Monday March 2 – China Caixin manufacturing (February)
Monday March 2 – US Construction spending (January)
Monday March 2 – US ISM manufacturing index (February)
Wednesday March 4 – US ISM services index (February)
Wednesday March 4 – US ADP employment (February)
Wednesday March 4 – US Federal Reserve Beige book
Thursday March 5 – US Factory orders (January)
Friday March 6 – US International trade (January)
Friday March 6 – US Employment (February)
Saturday March 7 – China International trade (Jan & Feb)
Food for thought:
“I talked to him (Bill Gates) in the last few days about it and he’s bullish on the long-term outlook for a universal prevention of coronavirus.” – Warren Buffett
Stocks shorted:
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.
Chart of the week:
Source: finance.yahoo.com
Peter Switzer used this chart as an example of the market rebound in 2002-2003 following the SARS outbreak in ‘Should you get in & buy stocks now’ on Switzer Daily, 26 February 2020.
Top 5 most clicked:
- How are your 10 stocks for 10 years faring? [1] – Peter Switzer
- Should you put some of your stored cash to work during this market correction? [3] – Charlie Aitken
- 3 ways to play an eventual market rebound [5] – Tony Featherstone
- Buy, Hold, Sell – What the Brokers Say [7] – Rudi Filapek-Vandyck
- Look at who’s reporting this week [4] – James Dunn
Recent Switzer Reports:
Monday 24 February: Review of 10 stocks for 10 years [11]
Thursday 27 February: Should you put some stored cash to work? [12]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.