Coronavirus and the Stock Market: The Power of Panic
It has been quite a week! As I write this morning, S&P 500 futures are falling again, indicating an opening that would represent a decline of over thirteen percent since last Friday’s close, which was already off from recent highs. There are all sorts of records being broken within that. It includes the biggest single-day point drop in the Dow and is the biggest weekly decline since the financial crisis. All scary stuff, right? But maybe scary is the point we should be focused on.
This a full-blown panic and has gone way beyond the logical already. That is an inescapable conclusion when you see news like this, that 40% of American beer drinkers won’t buy Corona right now because of the coronavirus. Markets aren’t the only place where rationality and reason are the first casualties of panic, obviously.
The level of panic and lack of logic is visible in the other direction too. Shares of Alpha Pro Tech (APT), a maker of surgical masks, have risen over 500% this week as everyone looks for a winner in all of this.
For even the most calm and logical trader or investor, however, panic creates a dilemma. As the old traders’ saying goes, the market can stay illogical a lot longer than you can stay solvent.
Most of us like to think that the big players in the markets are smarter than us, that everything they do is reasoned and rational, but that is a hard belief to cling to at times like this. It is, however, quite possible that that is still true. Traders understand the power of panic and will use that to make money the same way they will use anything else. In many cases, the reason for a move is irrelevant, all that matters is squeezing the most out of it that you can.
Even before we plunged these depths, it was obvious that while coronavirus was the oft-stated reason for the selloff, there had to be something more going on here. Do you really think that a flu-like illness, even one that is spreading quickly and has what seems at this point to have a fairly high rate of fatality, will wipe an average of thirteen percent off the earnings of all 500 companies in the S&P index for a sustained period? The history of previous virus scares suggests it won’t.
The size of the stock market reaction is more likely the result of inflated stock valuations and other risks that were known before anybody had heard of the novel coronavirus. As I pointed out last Thursday morning, just before all this began, stocks were primed for a drop before too long, virus or no virus.
Much more relevant than any disease is the fact that prior to the earnings season just ended, we had four consecutive quarters of declining year-on-year profits for S&P 500 companies. That is not that surprising after such a sustained, strong growth in profit but the fact that all the major indices continued to hit record highs throughout that suggested that something had to give.
Panics like this are part and parcel of trading and investing. They come and go. Some of the fears turn out to be justified, as they were in 2008 and 2009, but that was a panic about the very fabric of the financial system. More usually, they end up like the Ebola panic, forgotten and moved on from a few months later.
The problem is that panic is much more contagious than even the coronavirus. I will avoid using the now-cliched quote from Warren Buffett, but for long-term investors in particular, maybe it is nearly time to start getting greedy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.