- Growing fears of the spread of a novel coronavirus, now named COVID-19, crushed the market last week.
- Equities had their worst weekly performance since the financial crisis as the major indices are now down some 15% from recent highs.
- Stocks had rallied into overbought status before these latest worries, but the big sell-off is being fueled largely by the 24/7 news cycle and social media.
- Investors need to keep calm, have a game plan, and remind themselves the domestic economy still remains robust.
- Our observations of last week and updated COVID-19 investing strategy are presented below.
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Lunacy is when you can't see the seams where they stitched the world together anymore."- Stephen King as Richard Bachman, Rage
The sour tidings of the 'Ides of March' seemed to have come early this year as equities had their worst weekly loss since the depths of the financial crisis in 2008. The trigger for the decline was growing worries about the spread of the Wuhan coronavirus, which is also now known as COVID-19, which sounds like a title of a Stanley Kubrick movie.
While this outbreak has seen few deaths outside of China as of yet, it has spread to myriad other countries, most notably, South Korea, Japan, Iran, and Italy. Over 200,000 flights have been cancelled since this virus started to make headlines, mostly to and from China. Global supply chains are being impacted, and American multinationals like Apple (AAPL) have shut many operations in China. Japan is closing its school system entirely for the time being, and some factories in Italy and South Korea have been shuttered. New travel restrictions are being issued, and this will probably be a trend in the coming days and weeks.
This spreading global fear of a potential pandemic has hit world stock markets hard last week. Since hitting all-time highs on February 20th, the S&P 500 has dropped some 15% and is now deep in official 'correction' mode. Many sectors of the market have already entered 'bear market' territory, including most of the energy sector, other commodity-related areas and transports such as airlines.
In short, the market has turned incredibly ugly on a dime as hysteria (aided by a 24/7 news cycle and social media) has spread quickly across the planet.
However, it should be noted that the current domestic economy is quite strong. As noted in my post the other day, we got some very solid economic readings Friday, including.
- February Consumer Sentiment came in slightly above expectations.
- Chicago PMI levels were much higher than the consensus and hit six-month highs.
- January Personal Income growth came in at 0.6%, twice the 0.3% projections.
Here is my anecdotal take on the domestic economy based on a walk around New York City in frigid temperatures Friday night. Every bar and restaurant I passed was packed on a cold and windy February night. My favorite dive bar where I met a friend, and where one can almost always can find a seat, was three deep. Jeannette, who I was meeting for dinner later, was in a panic because she couldn't find a single open reservation at a dozen different restaurants on OpenTable. Fortunately, I ducked into my favorite Italian restaurant, where I know the owner, on the way to meet my friend at the bar and managed to snag a place for two hours later, at the counter! We enjoyed branzino, duck ragu and tiramisu in what was a completely packed and very loud west village hangout later in the evening.
Now, given that Wall Street just got absolutely crushed last week, you would think the one place that might be showing some discretionary consumer spending caution would be NYC. However, I did not hear one person even mention the coronavirus and didn't spot a single face mask the entire night. I did hear several conversations along the lines of 'I hate Trump, but Sanders?' in this very liberal city, but that is a topic for another article.
As my Forum members and Real Money Pro followers know, I have been preaching caution on equities for many quarters now. And no, I hadn't an inkling of something like COVID-19 coming out of left field to smack the markets like what happened last week.
The fact is that equities had gotten ahead of themselves. The S&P 500 advanced nearly 30% in 2019, despite no earnings growth on a year-over-year basis. That simply is not sustainable. I have been advocating for raising cash allocations within portfolios and using risk mitigation strategies like Buy-write orders which are known as covered calls for many months now. We even added an 'option play of the week' feature to both The Biotech Forum and The Busted IPO Forum in the second half of last year to highlight these opportunities.
I could see the S&P 500 entering 'bear market' territory if we continue to get reports of COVID-19 cases in new countries in the days and weeks ahead, but I believe we are more than halfway through any sell-off. The Federal Reserve is already making noises about intervening with rate cuts, if necessary. In addition, the yield on the S&P 500 (1.9%) far exceeds that of the 10 Year Treasury (1.16%) in what is a historically rare occurrence. A small rally late Friday in equities was also encouraging.
As can be seen above (as of February 29), the United States has seen few coronavirus cases so far. The red above marks states that have at least one coronavirus case confirmed, while blue marks states where at least one individual is suspected of having COVID-19.
As of Sunday morning, only one person in the whole country has been confirmed dead of the disease, and he was already in poor health. For those wanting some additional reassurance and perspective on this outbreak, there was a good article on RealClearScience this morning about five good reasons we should not panic about this most recent outbreak of a virus that could eventually get the 'pandemic' label.
My game plan remains the same as it has been for some time. I will continue to buy additional declines incrementally using buy-write orders both in ETFs and attractive individual equities.
One ETF I plan to add to via covered calls if this pullback continues early next week is the Energy Select Sector ETF (XLE) whose two largest holdings by far are Exxon Mobil (XOM) and Chevron (CVX). This ETF is already down a bit over 30% in 2020. In addition, the ETF yields an almost unheard of five percent. Adding an option premium component to that via covered calls seems to be a prudent strategy that should pay off in the months ahead as eventually COVID-19 is contained and fades from the headlines.
In the meantime, I look forward to the beginning of March after what was the ghastly end of February as far as investors are concerned.
On War - At the end, the only real statement either side can use is 'It seemed like a good idea at the time." - Marsha Hinds
Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum
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This article was written by
Bret Jensen has over 13 years as a market analyst, helping investors find big winners in the biotech sector. Bret specializes in high beta sectors with potentially large investor returns.
Bret leads the investing group The Biotech Forum, in which he and his team offer a model portfolio with their favorite 12-20 high upside biotech stocks, live chat to discuss trade ideas, and weekly research and option trades. The group also provides market commentary and a portfolio update every weekend. Learn More.
Analyst’s Disclosure: I am/we are long XLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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