Coronavirus-putting things in perspective

Coronavirus-Putting things in perspective: Fed cuts rates by 50 bps, Volatility rises to 50, 90% of the stock value is based on earnings after current year, Prof. Damodaran gives his S&P 500 valuation post coronavirus, Joe Biden surges in Super Tuesday giving a boost to the markets

1. Amid growing coronavirus concerns, Fed cuts rates by 50 bps. This is the first time Fed has intervened in between meetings since the financial crisis. While this will do little to improve coronavirus situation, the easing by the US Fed and other G-7 central banks will help ease financial conditions.

2. Dow Jones has the biggest single-day decline last week and rose by highest points in history this week among volatility hitting one of the highest levels since the financial crisis.

3. Among this volatility, we should not forget what Prof. Jeremy Siegel reminded us that 90% of stock valuation is based on the earnings next year and in subsequent years. So, if we have a rebound in the second half of this year because of pent-up demand, 90% of the fair value of any stock should be unaffected. As this year’s earnings will be under pressure due to coronavirus, the focus is on recovery and next year’s earnings to reprice the markets.

4. Good thing is, that China was able to contain the spread in the last few days and the world can follow the steps that China took. Fear is that once people resume work and other economic activities in China, there could be a second wave. It will take many months before we have a vaccine. But, coronavirus is already a front-and-center issue for global governments and central banks. With coordinated efforts, we should be able to contain and fight the virus more effectively.

To put things into perspective, every year, millions of people get infected and 20-60K people die from ordinary flu in the US. As per WHO, the Fatality rate of coronavirus is higher than that of the ordinary viruses but does not transmit that efficiently.

5. Prof Damodaran gave his initial estimate of the S&P 500 valuation last week, which puts S&P in the range of 3000 here. These numbers can change as we learn more about the virus.

6. Our View – It is still too early to know the full extent of the effects of the virus. The market can undershoot or overshoot in the short term. But, eventually, lower rates support higher market multiples. With revised down S&P 500 earnings of $150 this year and $160 as the base case for next year and taking Forward PE of 19 (That market was trading at pre-corona virus), S&P can be valued at 3040. As we know more about the coronavirus effects, we can update our estimate.

7. With a 10% market drop, long term investors should continue dipping their toe on any pullback. We had short term bottom at 2855 on Friday and with anticipated worst case in the 2650-2700 range, this is a good opportunity for investors sitting in cash to slowly deploy for the long term. We know, Warren Buffett is already taking advantage of the sell-off https://www.investors.com/news/warren-buffett-raises-stake-delta-air-lines-stock/

8. China’s passenger car sales fall 80% in February as demand drops