A Perfect Storm: Coronavirus, Major Earnings Reports And An Overvalued Market Could Slam Investors This Week

The Chinese economy—and possibly the world economy—will take a hit in the short run

Photo: Depositphotos.com/DragonImages

Topline: It’s a big week for the market with a host of major companies set to report earnings as stocks pare back from near-record highs on rising concerns over the severity and economic impact of the deadly Chinese coronavirus.

  • It’s a huge week for earnings with Apple, Starbucks, Facebook, Amazon and others all reporting, even as investors grapple with the financial fallout from the deadly coronavirus.
  • Amazon is expected to report $86 billion in sales and earnings per share of $4.05, and Tesla is expected to bring in $7.05 billion in revenue and earnings of $1.65 per share.
  • Typically during a week like this, all attention would be on earnings alone, but China’s coronavirus is playing a huge role in the direction of stocks as the disease rapidly spreads with no vaccine in sight.
  • Making things even riskier for investors is a market that’s trading at “unsustainable valuations,” according to Adam Crisafulli, founder of Vital Knowledge, who says that the coronavirus is acting as an added headwind at a time when stocks are becoming “extraordinarily sensitive to even the smallest setbacks.”
  • The spreading virus is already having an impact on consumer demand and tourism during the busy Lunar New Year period (almost 50 million people and more than a dozen cities are currently on lockdown), and U.S. companies with businesses in China are not exempt from the pain as some have already closed stores in the region.
  • Hotels, airlines, cruise and casino operators, big retailers and consumer goods companies have all so far been affected by the financial impact of the coronavirus.

Crucial statistics: All three major indexes are off to a rough start this week after recording their worst losses in months on Monday. The S&P 500 was down 1.6%, the Nasdaq Composite index 1.9% and the Dow Jones industrial average 1.5%. It was the Dow’s worst single-day drop since October 2, 2019, the S&P’s since October 8, 2019, and the Nasdaq’s since August 23, 2019, according to Dow Jones Market Data. Crude oil prices also hit a three-month low on Monday, with U.S. West Texas Intermediate falling to $53 per barrel.

Crucial quotes: “Hopes that the virus would be contained were squashed over the weekend,” says Ryan Detrick, senior market strategist for LPL Financial. “Although historically these outbreaks have been buying opportunities, the bottom line is investors are taking a ‘sell first and ask questions later’ approach right now.”

“The Chinese economy—and possibly the world economy—will take a hit in the short run, and lower prices are a rational response to the increasing spread of the coronavirus,” predicts Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance. “However, over the medium term, this will likely prove to be a buying opportunity.” Zaccarelli compares the coronavirus with the SARS outbreak: During the five-month period starting in mid-November 2002 until mid-March 2003, the S&P 500 dropped 12% but ended up actually finishing that year 19% higher than where it started, he notes.

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