COVID-19 (coronavirus) has caused world markets to plummet. From its all-time high of nearly 3400 on February 19th, the S&P 500 Index has dropped just over -16% to a low of 2850, before bouncing. There's likely more downside ahead. The probabilities suggest that we have entered a bear market, rather than just a market correction. The speed of the decline may make this a short bear market, rather than a longer, more protracted one.
You can take the person out of the Stone Age, but you can’t take the Stone Age out of the person – the coronavirus outbreak is changing human behavior. We actually know what people will do if they think going out may kill them – they won't go out. And this is going to dramatically affect the global economy, at least in the short term. People don't act rationally if they perceive their survival to be at risk. Humans today still possess those traits that made survival possible 200,000 years ago – an instinct to fight furiously when threatened and/or to flee to safety, wherever it may be found. In this case, it looks like the safety of the home wins out. The important thing to remember during this potentially unnerving time – don't overreact.
Fear and greed rule the day – succumbing to these emotions can profoundly harm your portfolio. Investor sentiment swings from greed to fear and back, over and over again. The Fear & Greed Index (FGI), serves to quantify this behavior.
In a February 2nd, Sunday night email to clients, we warned of the possibility of a 5-15% stock market correction, depending on the severity of the coronavirus outbreak. We said at the time, in part, "...we follow a variety of 'sentiment indicators'. These are very useful tools which can often signal market turning points. We've written about this many times over the years. Here is the Fear & Greed Index reading of three weeks ago. Caution is in order when a reading of 90 or greater is achieved..." So in a matter of just a few weeks, investors have managed to go from FOMO (fear of missing out) to now GMO (get me out). Below is the FGI on January 9, 2020. It managed to stay above the 90 level for three weeks before turning:
Here is the current reading of the FGI as of the market close on Friday, March 6th - a complete flip in market sentiment.
We've gone from "extreme greed" at 93 to "extreme fear" at 6, in a few weeks time! When a reading of 10 or less is registered, it's time to start putting together a list of stocks to buy. It does not mean to go "all-in". The index can stay at a depressed level or even move lower for an extended period of time. At the market bottom in March 2009, the FGI registered a reading of 2.
The news cycle is likely to cause additional anxiety and, in that case, markets may not have yet found their bottom despite having hit "official" correction territory. Further drops are highly probable.
In fact, another 10-15% drop from here, particularly as more cities are quarantined and the economy gets whacked with a coronavirus-induced slowdown, is not outside the realm of possibilities. A "crash-like" downside move cannot be ruled out. When the market is truly a "buy", you won't want to buy it.
Having some dry powder to deploy when the market eventually bottoms will be key. By taking precautionary measures and continuing to manage risk, we're in an excellent position to take advantage of a new long-term buying opportunity.
Selloffs always feel like the end of the world – look for the silver lining. This episode of market turbulence will eventually end, leaving stocks at very attractive valuations.
Historically, times like these have always proven to be excellent buying opportunities. Remember that years after the bird flu, swine flu, SARS, MERS and Ebola all ran their course, the market has always gone to new highs, every time.
I'm betting that this will just be another turbulent event that investors will likely look back at as a big opportunity.
Great ready for massive, globally-coordinated monetary and fiscal stimulus. It's coming...
*Coronavirus image – nature.com
**GFI Index – money.cnn.com
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Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser headquartered in Short Hills, New Jersey. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.