Where I three weeks ago, as you can see in the article below, was surprised that the market did not price in anything for the Corona virus, I am currently a bit surprised with the aggressiveness of the sell off in equities. Markets do need to price in some risk. The virus does affect trade and world GDP on the short and medium term. On the longer term the damage of this virus is expected to be small. Corona virus is the theme currently. Everyone who reads the news sees that it is all and only about the Corona virus. In the markets, the virus gets hyped and people scare each other off. In quiet times it is all about fundamentals and how the economy is doing. Currently no one does care. Investors have just been selling and selling and because the damage of the Corona virus is difficult to predict, they have just been selling their stocks. People are just following each other and this created the crash of last week.
Heaviest sell-off since 2008
Last weeks selling has been the heaviest we have seen since 2008. In 2008 there was a structural massive problem in the market. With unavoidable huge mortgage losses for banks. The downticks of last week are most likely a correction in the market. In the last years the market has performed very well. Investors are taking profit and are overreacting currently. People do see, like in Dec 2018, that the markets can be risky. Investors might start to focus a bit more on value stocks and get a bit away from the high multiple businesses. Some companies are valued at very high multiples like Tesla, Facebook, Amazon, et cetera. Large amount of downside potential for these stocks. Other stocks that do make steady money and are being priced at reasonable or low multiples have also been punished severely last week.
The baby has been thrown out with the bathwater.
What to expect from the upcoming week?
High volatility on up and downticks. I personally think is likely we will have seen or are seeing a bottom for now in the upcoming days. I do expect that the market does rebound heavily this week. I am not saying we are going to just see a V-shaped recovery. We will probably still see here and there some strong outbreaks of the Corona virus. For the market to keep falling, I think soon we need to see really bad news. Like a massive outbreak in the US with over thousands of cases. My base case scenario is that the Corona virus keeps on spreading but in a somewhat controlled matter. Slowly the hype will slow down with that as well. Large gatherings and more flights might get cancelled but I do not expect full close downs of economies or countries. Something that the markets seem to start pricing in. Some analysts are expecting a quick V shaped recovery. I do not think that will happen quickly. I think we will see a rebound and after that up and down high volatility, followed by a recovery back to the all-time highs in the upcoming months. Some companies will suffer, but with central banks and governments easing, I would expect that investors will start focusing on the strong US economy and a strong expected Chinese economy in the second half of the year. A move back to rationality.
Fort the upcoming days it is interesting to see how the situation does develop in South-Korea, Italy and Iran. Those three countries have been seeing a quick increase in Corona virus cases in the last days. If this accelerates quickly, very strong measures by the government might have to be taken. This can lead to more downticks in the stock market. A stabilization or improvement in new cases, will lead to heavy upticks as long as we do not see new significant outbreaks.
A general advice: most of you do invest for the long-term. On the long-term, the Corona virus will have little to no impact on returns. Do not panic and sell stocks if you do not have to. Also, no need to check your broker account every minute, hour or day. Do not stress out and keep calm.