The coronavirus was first identified in early January in China, but investors in U.S. stocks paid it little mind. Just last week, both the S&P 500 SPX, -3.35% and the Nasdaq Composite COMP, -3.71% hit all-time highs, a feat the Dow Jones Industrial Average DJIA, -3.56% had achieved the week before.
But after reports that highly contagious COVID-19, the disease caused by a new strain of coronavirus, had spread beyond China to Japan and South Korea, stocks began to slip. This past weekend dozens of cases appeared in Italy and Iran, dashing hopes that the outbreak would be contained to Asia.
On Monday, global markets plunged; The Dow shed more than 1,000 points , its third-biggest one-day point drop ever.
This is certainly a public health emergency — the coronavirus so far has claimed 2,700 lives and infected more than 80,000; more are likely to be afflicted.
This is also a full-blown stock market panic, and for investors, a buying opportunity. The epidemic eventually will run its course and world economies, especially the U.S., will resume their decent growth trajectory. So will the U.S. stock market.
Moreover, stocks were ripe for a correction. From its Christmas Eve 2018 low the S&P 500 had rallied 1,000 points, a 44% rise in less than 14 months. Complacency was off the charts. The CBOE Volatility Index VIX, -6.51% had dropped below 12 late last November and hovered near 12 or 13 until late January. It shot up to 24.50 on Monday. CNN Money’s Fear & Greed Index, which hit 96 out of 100 in January (I’d call it Wildly Extreme Greed), fell to 29 (Fear) on Monday. In late December 2018 it fell to 12, Extreme Fear. I wouldn’t be surprised to see it there again before this downturn is over.
More signs of panic: Gold GC00, -1.84% spiked to $1,673 an ounce Monday afternoon. That’s almost 60% above its December 2015 low of around $1,050. Gold has really taken off since late last November. Meanwhile, the 10-year U.S. Treasury note TMUBMUSD10Y, -0.06% matched its record low yields of July 2016 as investors rushed to scoop up safe-haven assets. Municipal bonds are at their lowest yields since the 1950s as cash has flowed in for 56 consecutive weeks. Investors have gone on a buying spree for all kinds of bonds, from corporates to emerging-market debt, as yields plunge and risk rises elsewhere.
I’m always suspicious when people panic this much. Could things be as bad as investors fear? China is much bigger and more central to the world economy and global supply chains than when the SARS epidemic hit in 2003. That’s why stocks including Apple AAPL, -4.75% , Nike NKE, -4.33% , Microsoft MSFT, -4.31% and Advanced Micro Devices AMD, -7.81% sold off big on Monday, as did travel-industry stocks such as American Airlines Group AAL, -8.52% and Marriott International MAR, -5.87% .
It’s hard to predict the impact COVID-19 will have on global growth. IMF Managing Director Kristalina Georgieva looks for China to have a sharp recovery once the virus abates and only a “mild impact on the rest of the world.” Economists polled by Reuters last week expected the coronavirus’s effects on U.S. growth would be “negligible and short-lived.” If things get worse, the Federal Reserve will no doubt keep the party going.
Meanwhile, consumer confidence remains strong and a recent Gallup poll showed Americans’ optimism about their personal finances are at or near record highs. That’s why Wall Street, which backed Hillary Clinton for president in 2016, is counting on President Donald Trump’s reelection in 2020. The prospect of victory by Senators Bernie Sanders (I-Vt.) or Elizabeth Warren (D-Mass.) gives them a cold sweat, but they must know deep down that neither would get many of their far-left policies through a narrowly divided Senate.
Against this backdrop, U.S. markets will likely decline further — the S&P 500 can fall 200 points before hitting its 200-day moving average, a critical support level — but then stocks should recover nicely. In 2019 there were two selloffs of 6% or more. This one probably will be deeper. You could start nibbling and buy more on further market declines to reach your target stock allocation, which does not mean 100% or even 80%, by the way. The world has been going crazy with greed and complacency, but that’s over for now, so here’s your chance to get into stocks at better prices while others are panicking.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.