What Investors Need To Know About This Latest Wuhan Market Crash

NYSE: SPY | SPDR S&P 500 News, Ratings, and Charts

SPY – Today’s featured article is Part I of a two-part special report, focusing on what investors need to know about the Wuhan outbreak. Continue reading for Part 1, and be sure to return tomorrow for Part 2.

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As I write this the S&P 500 is down 3.25% and the Dow Jones Industrial Average was down 1000 points a few minutes ago. This is by far the worst day for stocks in 2020, and indeed the worst day in over six months.

So here are the three most important facts investors need to know about the Wuhan outbreak, including how it will affect corporate earnings, as well as your portfolio.

In Part 2 (coming tomorrow), I’ll showcase four amazing dividend stocks that you can potentially use to cash in on this latest market “crisis”, which as always, is a great long-term opportunity for smart investors to make their own luck.

(Source: AZ quotes)

These are four stocks that I’ve been buying hand over fist in my retirement portfolio, where I keep 100% of my life savings.

Fact 1: The Wuhan Outbreak Appears To Be Turning Into A Global Pandemic

(Source: Johns Hopkins)

The good news is that the Wuhan outbreak, from a global perspective, appears to be stabilizing, as seen by the falling number of new cases each day.

(Source: Johns Hopkins)

So why is the market crashing?

(Source: MarketWatch)

Two main reasons. First, non-China cases have been soaring in recent days, particularly in South Korea, Italy, and Iran.

  • non-China cases 2/24: 2,300
  • non-China cases 2/23: 2,000
  • non-China cases 2/22: 1,700
  • non-China cases 2/21: 1,400
  • non-China cases 2/20: 1,200
  • non-China cases 2/19: 1,100
  • non-China cases 2/18: 1,000
  • non-China cases 2/17: 900

In the past week, cases outside of China have almost tripled, mostly due to South Korea where a cult was hiding sick members. Now the government is reporting those cases and suddenly there are nearly 1,000 cases in that country.

(Source: Johns Hopkins)

What’s also concerning is that it appears that the incubation period (during which people can spread the virus without showing symptoms) is longer than 14 days.

That is why some global health experts are now warning that a global pandemic of COVID-19 (the new virus name) is more likely than not. A pandemic is any disease outbreak that affects two continents or more.

When several countries have widespread transmission, then spillover to other countries is inevitable…One cannot shut out the rest of the world.”- Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases.

“Our window of opportunity [for containing the virus] is narrowing so we need to act quickly before it closes completely” –  World Health Organization Director General Tedros Adhanom Ghebreyesus

“We are at a turning point in the Covid-19 epidemic…We must prepare for the foreseeable possibility, even probability, that Covid-19 may soon become a pandemic affecting countries on virtually all continents.” -Lawrence Gostin, a global health law professor at Georgetown University

“For a virus pretty closely related to SARS, it shows very effective person-to-person transmission, something nobody really expected,” – Stephen Morse, a professor of epidemiology at Columbia University Mailman School of Public Health

COVID-19 has thus far proven about half as lethal as some earlier models estimated (3.3% vs 6.5% global mortality). And the good news is that its R-0 is lower than those early models estimated as well.

R^0 is how many people each infected person can be expected to infect and thus determines how bad outbreaks can be.

(Source: Vox)

Initial estimates put COVID-19’s R^0 at about 4.0. Current estimates say 2 to 3 which makes it slightly more contagious as the flu, about as bad as Norovirus (the gastric virus that plagues cruise ships from time to time) and far less infectious than the measles (the most contagious virus ever discovered).

Basically, the good news is that COVID isn’t likely to kill millions as previous pandemics have done.

(Source: Bridgewater Associates)

The bad news is that the outbreak may last several months, which brings us to the economic and stock market effects.

Fact 2: The Economic & Corporate Earnings Effects

According to IHS Markit chief business economist Chris Williamson, the reason for the unexpected deterioration in the composite manufacturing/services PMI report on Friday (for February) was the Wuhan outbreak.

The deterioration was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions…

Compared with official data, statistical analysis indicates that the survey indices are consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February. ” – IHS (emphasis added)

Friday was the “flash” or preliminary PMI survey release, and later this month we’ll get the revised version. However, what partially spooked the market on Friday (and sent 30-year yields to their lowest levels in history) was the composite PMI (manufacturing + services) coming in under 50 for the first time since 2013.

That means that, at least for now, it looks like US business activity is in a VERY small contraction, or at least may have been in February.

(Source: MarketWatch)

0.6% economic growth would be half the blue chip consensus, created by the 15 most accurate economists tracked by MarketWatch.

The good news is that the effects of the outbreak for the full year are expected to be just 0.1% to 0.2%, according to Oxford Economics/Haver Analytics.

But of course, that’s just the big macro. How will corporations be affected?

Here is the global exposure by industry to China. US utilities, REITs and energy stocks have the least exposure, while financials, consumer discretionary and tech have the most exposure.

With the S&P 500 now about 25% tech and 19% in the big five (Apple, Alphabet, Microsoft, Amazon, and Facebook), the broader market is at high risk of a COVID-19 induced pullback/correction.

Here are the US companies most exposed to COVID-19 as measured by revenues from China.

Overvalued companies like Apple, Nike, McDonald’s, and Microsoft are at high risk of taking a short-term beating. Fortunately, those are all companies I’ve been telling readers to avoid buying for many months now.

Remember that the effects of COVID-19 are temporary. Only permanent events impact the long-term thesis of a company.

But what can investors expect from this latest COVID freakout?

Fact 3: How The Stock Market Is Likely to React

(Source: FactSet Research)

FactSet has run stress tests modeling how badly COVID-19 might impact various global markets. China’s transportation stocks might be facing a 25% bear market from current levels. Oil prices might take a beating as well, with 10% to 25% potential declines coming in the short-term.

Of course, models are just that, and all predictions come with margins of error.

US bond yields might fall another 0.4% (to 1% on 10-year yield) in the most conservative (bearish) scenario.

In terms of US stocks, FactSet’s stress test model estimates that we MIGHT be set for another 8.4% decline, possibly resulting in a 9% to 10% pullback/mild correction.

The base case that FactSet expects is about a 5% to 6% peak market decline, making this a mild pullback.

(Source: Guggenheim Partners, Ned Davis Research)

Historically pullbacks, which have occurred every six months since 1945, last one month, see stocks fall 7% and then recover to record highs a month after bottoming.

(Source: Charli Bilello)

That’s been the same frequency, duration, and severity as pullbacks seen during the last decade. Stocks fall a median of 26 market days, by 7.9%, and then rapidly recover from whatever risk factor that investors freaked out over.

FactSet expects that the only sector that might go up in a COVID-19 correction would be utilities. REITs and consumer staples, due to 1% 10-year yields MIGHT be spared significant declines while energy might fall another 17%.

Tomorrow I’ll publish part two of this report, highlighting the companies you should and should not consider buying to profit from the lastest COVID freakout.

SPY shares were trading at $319.06 per share on Tuesday morning, down $3.36 (-1.04%). Year-to-date, SPY has declined -0.87%, versus a -0.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Adam Galas

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...

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