Stock prices being seriously hit by the recent COVID-19 outbreak

Stock prices being seriously hit by the recent COVID-19 outbreak

Even though the stock market has been responding positively to the signs of the coronavirus outbreak slowing, stocks have still a long way to go until the market will gain traction. It mostly happens due to investors’ fear of the stock market going down again as it is still unclear which direction the current situation will take.

Most analysts describe the beginning of this month as a time of transition for the market. What is more, everyone by now agrees that the late-March selling crescendo was the bottom for the market, meaning that from that moment, the market is supposed to take up a growing trend. Namely, Goldman Sachs analysts announced that thanks to both fiscal and monetary policies put in place by the European countries, it appears that the worst has already passed, unless the virus will take another surge after the economy reopening.

Ed Keon, chief investment strategist at QMA, even said:

“I think we’re in a new phase. The stock market bottomed when the cases in Italy seemed to peak. It’s been driven by terrible, and not as terrible news on the virus, plus a tremendous policy response both on the fiscal and monetary side...A big part of the initial phase has been reversed. What we’re trying to wrestle with now is what the next couple of years look like.”

Let’s go back to March 2020: the stocks were falling sharply throughout this period, while lawmakers in different states were failing to push through massive fiscal stimulus to support the economy.  On March 22, 2020, it was reported that the Dow Jones Industrial Average closed 582.05 points lower, or down 3.1%, at 18,591.93. Notably, this was the lowest closing level of the stock since November 2016. The S&P decreased for 2.9% bringing the ratio value to 2,237.40. At the same time, the Nasdaq Composite was down just 0.3% at 6,860.67 and only because investors were still hopeful about the technology stocks on the market.

That was the time when the central bank of the United States announced that it is ready to present an open-ended asset purchase program which will be in the “amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”

To this, Paul Hickey of Bespoke Investment Group, wrote in one of his notes:

“While the Fed’s actions are an enormous help, the only way the markets are going to find sustainable improvement is when the economy is allowed to come back to life, or at least there is a real path in place for how that is going to happen.”

This, however, is not very likely to happen any time soon amid the rise of the coronavirus cases in almost every country around the world.

Moreover, the outbreak of the coronavirus and inability of the government to put in the necessary measure led the New York Stock Exchange to close its trading floor and switch to all-electronic trading.

The week before that, the stocks suffered their biggest decline in only one week ever since the financial crisis in 2008. Namely, the S&P 500 dropped by more than 13%. This, together with all the previous stock price declines since the beginning of the outbreak put the broader market average more than 34% below its record set on February 19, 2020.

It is worth noting that this was the moment when many investors and traders started massively buying the stocks as their prices were ridiculously low during that time. Thus, a local Georgian website, Kapitali.ge, has mentioned that there is an increasing interest in taking an opportunity out of the whole situation on the stock market (locally: სავაჭრო აქციები) as there were more people searching for stock trading as never before.

So here comes the biggest question: is it worth buying stock now, when everything seems to be a bit better, or it’s wiser to wait? Well, that would make sense as after all, the S&P 500 is down 21% from recent highs. But should it be regarded as a signal to act, or is there more trouble yet to come? Clearly, investors are wondering whether the market has already bottomed out or not. At the moment, even though the S&P 500 was down more than 30% at one point in March, it has rebounded 20% since then.

Warren Buffet, a great investor and financialist who has survived many downturns, advised investors not to try and time the bottom.

“We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

Meaning that the investors should not miss out on opportunities to buy stocks at lower prices while they are busy trying to predict when exactly the stock market will hit its absolute bottom. Buffet clearly said that downturns are great opportunities to buy:

“A market downturn doesn't bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”

It is also worth adding that by far the biggest takeaway from Buffett’s recent discussions on market crashes is a piece of advice to be a net buyer of stocks and to stay invested for the long haul. Therefore, drawing a bottom line here, we would like to admit that with the S&P 500 being down by 21% from recent highs, there are more good deals in the stock market that they were in mid-February, for instance. That is why you need to keep buying, whether this proves to be the bottom of the stock market or not. As over the long term period, the investments made during downturns like this can provide a nice boost to investment returns.

Author: The FINANCIAL