Most Americans — and most people across the globe — haven’t caught the coronavirus from China. But financial markets have. Over the past few trading days, the stock market has fallen off a cliff, collapsing 12% off all-time highs in record time, on fears that the rapidly spreading outbreak will have a much more significant impact on the global economy than previously anticipated.
But, as most people do who end up getting the coronavirus, stocks will ultimately shake off coronavirus fears, and rebound in a big way by the end of the year.
Call me an eternal optimist, or a Pollyanna. Call me whatever you want. But, I’ve looked at the facts. I’ve analyzed the data. I’ve researched historical precedents. And nothing tells me that this is the end of the bull market.
Instead, much like the eight other corrections this bull market has had since since 2009, the coronavirus selloff in stocks is just a hiccup. With time, this hiccup will pass, and stocks will rebound.
Specifically, there are five big reasons why stocks will rebound from the coronavirus selloff. Those five reasons are:
- The coronavirus outbreak is temporary, and will die down within a few months.
- U.S. economic fundamentals remain strong.
- The Federal Reserve remains supportive of the expansion.
- Corporate profit growth will undergo a V-shaped recovery in the second half of 2020.
- Stock market valuations are more palpable today than they have been in some time.
All in all, stocks will rebound from today’s coronavirus panic. So, I’d be using recent weakness to buy into high-quality, long-term winning stocks to buy like Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), Nike (NYSE:NKE), Netflix (NASDAQ:NFLX), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Tesla (NASDAQ:TSLA), Okta (NASDAQ:OKTA) and many, many more.
Here’s a deeper look at why.
The Coronavirus Outbreak Is Temporary
The coronavirus outbreak is big, scary and volatile. It’s rapidly spreading. It’s killing people. But, it’s still just an epidemic. And, like all other epidemics before it, this too shall pass, and arguably sooner, rather than later, for a few reasons.
First, warmer weather is coming. Warmer weather tends to kill influenza-like outbreaks. There’s no reason to believe this strain of coronavirus is any different. Thus, warmer weather in April and May will help suppress and kill the virus.
Second, a vaccine is coming, too. Various companies, ranging from Gilead (NASDAQ:GILD) to Moderna (NASDAQ:MRNA), have developed coronavirus treatments and vaccines in record time. Those treatments have shown promise. It is quite likely that, within the next few months, those treatments pass clinical trials and become widely distributed to affected patients. Needless to say, wider distribution of these vaccines will help suppress coronavirus spread.
Third, governments have been quick to act against the coronavirus and quarantine confirmed cases. Such quarantining works. Just look at China. It was quick to isolate Wuhan and quarantine patients with confirmed cases. Now, about two months after the onset of the outbreak, the coronavirus is dying down in China. New reported cases are falling, recoveries are rising and active cases are dropping. For all intents and purposes, China has successfully leveraged strict quarantining to “beat” the virus in two months, with less than 0.01% of its population getting infected and without the help of warmer weather or a vaccine.
As such, it seems entirely likely that the rest of the world will be able to “beat” the virus in less than two months, and withstand minimal damage in the process. Come summer 2020, then, the base case is for the coronavirus outbreak to be old news.
U.S. Economic Fundamentals Remain Strong
Forget about the coronavirus for a moment. Everywhere else you look, the fundamentals of the U.S. economy appear to be on solid footing.
Consumers are rock solid. We have record-high employment and job participation. Wages are rising. Inflation is checked. Consumer prices are reasonable. Household balance sheets are strong, with consumers saving at a record-high pace while owning record-low debt. Credit card delinquency rates are still very low, too.
Corporations are rock solid, too. Yes, their debt levels are elevated. But, so are their cash levels, so on a net basis, they aren’t overly levered. Low rates also help ease the burden of that leverage. Sales are rising. Profit margins are robust. There’s tons of innovation playing out, from 5G to cloud computing to self-driving cars, and everything in between. The sum of that innovation should keep growth vigorous for the foreseeable future.
Overall, then, the U.S. economy looks good. Yes, if the coronavirus sticks around for a year-plus and kills off thousands of people, the story will be very different. But, that isn’t the base case, which is instead predicated on the idea that once the virus fades within the next few months, the economic picture will get back to looking good.
The Fed Is Supportive
Financial markets plunged when the Federal Reserve recently cut interest rates by 50 basis points. But, in the bigger picture, that cut is a good thing, as it shows that the Fed is committed to sustaining the expansion through quantitative easing.
Liquidity can’t solve all problems. For example, it can’t come up with a cure to the coronavirus. But, it can solve a lot of problems. Indeed, one could very reasonably argue that the record bull run over the past decade has been fueled mostly by liquidity.
So long as the Fed remains committed to injecting liquidity into the system, then the economy remains in a prime position to bounce back once coronavirus fears fade. That’s because you’ll have low borrowing costs and easier lending conditions, which will support more corporate and consumer spending.
Also, low interest rates provide justification for higher equity valuations, and that’s always a plus for the stock market.
Corporate Profit Growth Will Rebound
There’s no doubt that corporate profit growth will hit a snag in the first half of 2020. Sales growth will slow thanks to slowing demand, while supply chain disruption will provide a drag on profit margins. Flat sales growth and margin erosion will lead to falling profits.
But, this snag — much like the coronavirus — will be temporary.
By the third quarter of 2020, global demand trends will recover as consumer and corporate fear of the coronavirus fades. Supply trends will also improve thanks to factories across the globe coming back online in full capacity. Corporate sales will grow. Profit margins will expand. Profit growth will come roaring back.
As go profits, so go stocks. So, this rebound in profit growth should lead to a strong rebound in stocks in the back half of 2020.
Valuations Are Palpable
The S&P 500 was trading near a record high 19-times forward earnings multiple before the coronavirus selloff. It was ripe for a correction.
Now, the index is trading at a much more historically normal 17-times forward earnings multiple, while bonds are trading at record-low yields. That’s an attractive combination for a valuation reflex rally.
By my numbers, assuming that the coronavirus takes a big hit in the first and second quarters of 2020, fades thereafter and corporate profit growth resumes at a steady pace, then profits per share in the S&P 500 in 2021 should be around $180. The stock market’s five-year average forward earnings multiple is 17. But, yields today are lower than they’ve ever been. Thus, there’s reason to believe that stocks deserve an 18-times forward multiple.
Assuming so, then $180 in 2021 earnings per share implies a 2020 price target for the S&P 500 of 3,240. That’s about 10% above where stocks trade today.
So, over the next nine months, I think stocks can and will head 10% higher.
The Bottom Line
Don’t let near-term coronavirus fears chase you out of the stock market, which has a history of being a smart long-term investment. Instead, use recent weakness to gradually buy at a discount. Don’t go all in on the dip at once. This a rapidly evolving, dynamic situation. Take nibbles here and there, and ultimately build sizable positions in some high-quality stocks at discounted prices.
Come mid-2020, you’ll be happy that you did.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.