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Coronavirus Will Spur Much Deeper S&P 500 Correction


  • People ignore valuations until there are no more greater fools, then something makes valuations suddenly matter.
  • Coronavirus is the something making valuations suddenly matter.
  • With a very likely severe economic slowdown coming, it's appropriate to use the "R" word finally.
  • I believe that investors should expect what I have termed a "skip-straight recession" with two down quarters spread across a year or two.
  • Investors should sell the rallies in the stock market and not buy back until there's a real panic sell-off.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »

Last week I discussed that Coronavirus Is A Match That Lit The Overvaluation Tinder. That piece went over several stock market valuation measures. All pointed to an extremely high risk of a severe correction - think year-end 2018.

It's clear that suddenly the overvaluation in the stock market, particularly the S&P 500 (SPY) (VOO) matters, at least to some people. As usual, it's the smaller investor who is the slowest to adjust asset allocations. As noted in my 2020 Outlook: Euphoria To Despair, the very wealthy, particularly through family offices, have been dialing back equity exposure for over a year now.

For folks who still refuse to understand the severity of the COVID-19 Coronavirus, let me summarize. It spreads similarly as the flu, but is between 15x and 30x more deadly, depending on what type of healthcare you have available.

WHO Covid-19 CoronavirusWHO Covid-19 Situation Report

The COVID-19 Coronavirus is likely to instigate an economic slowdown which could become a global recession. Consider the massive slowdown in China's economy already that accounts for a quarter of global economic output.

From the current, still overvalued, levels of the S&P 500, another 25% correction is growing in likelihood. It's past time for too many investors to take a very serious look at their risk tolerance and asset allocations. I'm reiterating that investors should completely dump the SPDR S&P 500 ETF (SPY), the Vanguard 500 (VOO) and similar funds.

Do Valuations Matter To You?

I have discussed for six quarters now that stock market valuations were very high. A single-digit percentage stock market correction has not changed that.

Stock Market Valuations

Jill Mislinski

An argument is often made that because interest rates are low, the stock market can sustain higher valuations. I would agree that is true, however, to what degree should be asked. Should the stock market be the third most highly

Send a direct message through Kirk Spano's profile page with the words "half price" in the subject line to receive your first year with Margin of Safety Investing for 50% off.

Find out how our team and resources can help you beat the markets in up and down cycles. Our approach could prove very valuable in a slowing economy with flat earnings and risks rising. 

This article was written by

Kirk Spano profile picture
Kirk Spano has managed money since the 1990s avoiding 3 major crashes, while creating income streams and finding high upside opportunities. He continues to manage wealth at his boutique investment firm and also consults for hedge funds and private equity. His passion is helping hardworking people make more money with less risk. Kirk is the leader of the investing group Margin of Safety Investing, where features include: the Quarterly Outlook & Game Plan, a monthly Global Trends ETF Report, access to the model portfolio & weekly research, buy & sell alerts, option strategies for cutting risk and retirement income, and chat. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

I own a Registered Investment Advisor, Bluemound Asset Management, LLC, but publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (461)


To me this sounds like a huge departure from the direction of the last two weeks. Anyone has insight to why and what it could mean? Are we going to the herd immunity argument to save the economy? Or maybe they feel good about ramping up healthcare readiness for the next wave? i.e: the healthcare capacity curve will be able to withstand the must-hospitalize curve?

@Kirk Spano Any insight?
Kirk Spano profile picture
He's completely over matched for the situation.
beyond growth profile picture
multiple young Mardi Gras patients - no health issues in ICU;
Mark Cuban and the NBA need to kiss China's ass for growth. Buy-backs are the remedy. Killing profit pressure is important. An unhealthy company will 100% fail without contracting.
Word now is Trump is considering closing the markets, much like resisting people being tested, they think it will reduce bad numbers?

A week before Trump was inaugurated, the Trump and Obama transition teams met for three hours to review the threat of a pandemic, every bit as deadly as the US and the world saw in 1918.




Any updated thoughts on if we're at the bottom? Seems like the drug scene is improving and stimulus is upon us. 2350ish bottom or do we go to 2000?
@namesarehard No where near the bottom IMO
Kirk Spano profile picture
If stimulus isn't over $2T, I think we see S&P under 2000 pretty quick.
E.D. Hart profile picture
...agreed...we are all socialists now...
J2kpn-No bear has lasted 10-20 years, but it could last a lot longer than we like.
beyond growth profile picture
US will have Japan stock market performance for 10 years !!!!
"In fact, Richter sees more pain ahead for the market and the economy, he said, with the possibility of a lost decade or more, as in Japan in the 1990s, where monetary policies failed to boost the economy for a multiyear span. "
If the market tanks what makes people think it will just bounce back like it always has? The fed has very few tools left. The markets are in bubble territory because of the fed and central banks. This time around we could see a 10-20 yr bear market. Reality will start to set in over time here. A lot going on and most have not been paying attention.
it won't

end of workd
For everyone posting that this is a hoax and its not serious will you sign off on the legal responsibility of people dying if it spreads like wild fire. And can we have your medical license number and the state in which you practice.
Kirk Spano profile picture
When the person who sounds the alarm says things are even worse, then what?

Well, I'm in my 5th major city in a month. Things are worse than I thought, and I thought it was pretty bad. This correction has not hit panic yet. When folks start rebalancing retirement plans and dump assets to get to almost 100% cash, that's when the beady little red eyes of the algos will look for a reversal. We aren't there yet. I think there is a very good possibility we blow through the major supports in 2200-2400 S&P 500 range and head to around 1700. Not a for sure, but a lot more possible than a week ago.
Long-Short Manager profile picture
Mitch McConnell and a couple other R senators just said no payroll tax cuts and the market dumped half the pop today. The dems are saying only Small Biz and sick leave relief. In any case, the stimulus should come after we're done dealing with the virus and for now just focus on public health and first response. The market is still staggering from each days news and not looking forward at all. What happened to the efficient market anyway?
Wez profile picture
@Long-Short Manager
"What happened to the efficient market anyway?"

That disappeared when Trump made Powell his lapdog...
Donggle profile picture
Investors should sell the rallies in the stock market and not buy back until there's a real panic sell-off. Does this mean I should short the market or sell something at a loss hoping to buy it back cheaper. This does not seem reasonable for the avg SA reader only hyperbole!
@Donggle Yes - you should sell at a loss or go short...there will be years to bottom fish IMO
beyond growth profile picture
Just heard this was the 5th worst end of February performance. And on avg it takes years to recover to previous highs (2 years best case scenario; avg. is 5-7 years). Yet every recovery has different mechanics involved.
Need to factor in Russia/Saudi Arabia oil price war and possibility of zero or negative interest rates.
Kirk Spano profile picture
Can you hear me now? Look for my #Crash2020 hashtag on Twitter. You can follow me there too if you like. @KirkSpano I'm targeting 2200-2400 on S&P 500 before bots turn their little red eyes on a reversal.
Thank you for the great and timely insight you've provided with this article. Since the Saudis decided they want to fight the Russians on oil pricing and market share, what are your thoughts on lower oil prices being an economic stimulus?

In addition, good news coming out of both China and S. Korea in terms of a decline in new Covid-19 infections.
beyond growth profile picture
China and So. Korea have taken drastic measures to reduce it or not publicize it. Either way, the US does the opposite, with no comparable drastic measures like China's quarantine of whole cities/neighborhoods and the US publicizes the hell out of a few people getting the virus and now a US marine got it. NBA games & crowds continue in the US, not abroad. "For the Love of Money"
Kirk Spano profile picture
There will be some minimal positive impact from lower oil prices, but we'll see how long it lasts. The odds of missiles flying between Iran and Saudi Arabia just rose exponentially again. At some point, they come out of their corners firing.

I believe the U.S. will have well over 1m Coronvirus cases. If we make testing widely available it will be much higher. As of now, the Admin doesn't really want to test for it. But, infections could rise as high as about half that of flu in a worst case, i.e. 5-25 million.
Yes seems sensible, there will be more short term panic in the US in my opinion before the virus is controlled, a good bounce once the virus looks to be under control, then a big dip again as the medium term effects on profits become clear causing a further decline (possibly quite large),

Then I expect a rally as economic prospects increase again. Some say we're due for a 4.5 year quarter cycle market dip in early summer, which keeps me on guard for the middle of this year, and will match up with how I think the effects of the virus will manifest themselves on the markets above, so there's the potential for a good sized dip later on this year.
Cash rich companies need to find the buyback bottom and allow itself to put in bottom feeding bids. Even if they never move it will secure the price and buffer fear. Companies need to kill profit pressure and contract through bargain buybacks.
I'm not a buyback expert so I'm not sure of the limits ?.. I wish Ford would cut the dividend and bid 8%, of this $6-7 a share market cap, on $6-7 or lower stock buybacks. Even if they put the bid in @ $2 it would stop the panic selling (unless we got that deal ^^^?
Ford isn't cash rich but they will get the money from a government and banking business that don't dare interfere with the unions new contract. Unless we all die its not going to be often that this earnings/price and rates will ever happen again?
Other companies should have it even easier than ford (except for the price. The top reason people aren't buying is because they think they can get it cheaper later.
beyond growth profile picture
I like a bull market but some people are really missing the true effects finance.yahoo.com/... The global economy is going to be hit in many areas. Once you read about the extended shutdowns it is logical to have more declines on the horizon.
it's been nine years of negative slant might be finally right lol
Correct way to invest- Kirk is Ranked #256 out of 7,170 Bloggers on TipRanks (#889 out of 13,433 overall experts) so if he has had a negative slant for nine years, that works for me.
Kirk Spano profile picture
not from me, I'm a new bear
You can't believe the numbers coming out of china. They have a history of lying... eat a grapefruit every day maybe that will help.
@j2kpn Chinese scientists recently did an experiment--they tested 320,000 people in Guangdong, a province with a low incidence of the virus. The tests showed 0.14% positive, confirming that they were missing only very few people with weak symptoms. The questions is whether the rest of the world can be anywhere near as successful in limiting the virus.
@wrdemott1 @Kirk Spano OK so you believe the Chinese, big mistake.
Vandooman profile picture
No, the market will probably not take a nosedive.
Purewater profile picture
So many virus and pandemic experts on Seeking Alpha!
Trade In Mexico profile picture
Yep and Kirk has had great pageviews with fearmongering articles but he has been so wrong not to be a buyer of the panic selling.
Kirk Spano profile picture
I have spots I'll start buying, but the market will be around 25% by then.
Coronavirus is now a 'worldwide pandemic,' German health minister says

Sir V-i-val profile picture
The number of cases in the country rose to 240 on Wednesday.....
240 on a population of 83,783,942...things that make you say hmmmmmmmmmmm....
Please read the article... the devil is in the details.
@fadi999 More likely the devil is hiding behind the details.
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