The markets are trading sharply lower this morning and undoubtedly you have heard the news media screaming about plunging oil prices and an expanding numbers of cases of coronavirus and quarantines. It can all be quite unsettling for sure, but know we are monitoring the situation very closely and will get in touch if we need to “do something.”
With that said, it is important to recognize that there are two distinct concerns at play (oil prices and coronavirus). How these concerns impact economic activity are quite different and how companies weather these storms are different as well. Let’s start with oil prices.
Oil prices softened over the last two weeks on the idea that a global economic slowdown from the coronavirus would result in lower oil demand. But what we are seeing today is completely unrelated to the coronavirus. Oil prices are falling because Saudi Arabia and Russia could not come to an agreement over production cuts and price targets. This impasse seems to be sparking a price war and taking oil prices down by as much as 30%. With falling oil prices, we are seeing drops in the stock prices of oil companies, which makes sense – lower oil prices will pressure the profits of oil companies. But beyond those oil-producing companies, lower energy prices is a boom for most of the rest of the economy. Consumers will find more money in their pockets almost immediately because of lower gasoline prices. More money in consumers’ pockets means support for companies that cater to the consumer. The transportation sector of the economy (airline, trucking, rail) will benefit as well. For the most part, lower energy prices will ripple through the economy in a positive way. Why the market sees this development as a net negative does not make a lot of sense. We seem to be in a temporary state of any news is bad news for the markets.
The impact on companies as a result of the coronavirus is more variable. For a company like Apple, sales might be delayed because of store closures or supply chain disruptions, but when customers decide to upgrade their phones, they will do that at some point. So any slowdown in sales is likely to be followed by an equivalent rebound down the road. If this is true, then it makes no sense for Apple to be trading 20% lower than it was two weeks ago.
The same is not the case for companies like Starbucks or Darden Restaurants. A Starbucks customer that buys coffee every morning on the way to work will not make up those sales if they are suddenly working from home for a week or two. But in the not too distant future, things will get back to normal and that customer is likely to go back to Starbucks on the way to work. Declines in the stock price of Starbucks because of the impact of the coronavirus will fade and the stock will trade again on investor’s views of future profits.
What about a company like Walmart? Walmart will likely not see much of a change in sales. Perhaps customer frequency drops, but anecdotal evidence suggests that consumers are “stocking up” when they do go to Walmart. While some might suggest supply chain interruptions for Walmart, the trade war (remember that news headline) demonstrated that Walmart is very resilient.
Financial companies (banks primarily) are being negatively impacted by lower interest rates. But lower interest rates will actually benefit consumers and companies with lower borrowing costs and will be supportive of the housing industry.
What we are learning about the coronavirus is that it seems to be more easily spread than SARS or MERS (other virus scares out of China), but that it is not as deadly as those two viruses. Emerging evidence suggests that the coronavirus has a similar impact as the seasonal flu, with lethal outcomes (as a percentage of infections) that are quite similar. One difference is that children fare much better – milder symptoms and no reported deaths. How the coronavirus plays out is still an unknown right now, but visions of a pandemic like the Spanish Flu of 1918 are likely overblown.
I continue to believe that this correction is much like every other one we’ve experienced since the financial crisis. The market was trading at all-time highs, the market seized on news headlines and uncertainties and down we go. These last couple of corrections (December 2018 and now) are obviously more unnerving than others because of the speed of the moves. That speed is likely a function of the dramatic increase in computer trading. Nonetheless corrections are a normal part of the market. Corrections are also a process that takes time to resolve – a return to all-time highs takes, on average, 4 months. Corrections often involve “retesting the lows.” The most recent low on the S&P 500 was 2855 on February 28. We exceeded that low this morning, but we’ll need the rest of the day to see how things play out.
Again, know that we are monitoring the situation very closely and we will get in touch if there is something to do.
