Will Covid-19 Crisis Be Short-Lived?
(Friday, March 13, 2020, 10:00 p.m. ET) — After plummeting 26.7% from its all-time record high, set just three weeks ago, the U.S. stock market soared 9.3% on Friday. Financial and economic indicators signaled that the Coronavirus crisis could be short-lived.
Forecasts for growth remained bright, according to The Wall Street Journal's monthly poll of 60 economists and the Federal Reserve Bank of Atlanta. In addition, stock prices have fallen well below long-term historical valuation and return norms.
The Atlanta Fed on March 6 updated its GDPNow calculation of growth in the current quarter. Its algorithm indicates the first quarter of 2020, despite Coronavirus will grow by 3.1%. This forecast was made a week ago, before sports schedules were postponed but after the outbreak.
Meanwhile, the consensus forecast of economists surveyed in early March by The Journal was for V-shaped contraction. over the four quarters ahead. They predicted negative growth in the second-quarter and then a third-quarter recovery back to the pre-Covid-19 growth rate of 2%.
By historical financial benchmarks, stocks are undervalued, after being overvalued just three weeks ago.
This chart shows the actual price of the S&P 500 index in black. The upper red line shows the value of stocks if they had been priced at 19 times their expected 12-month profit and the lower red line shows the value of stocks priced at 16 times their expected 12-month profit.
The dotted red lines show the expected profits on the S&P 500, applying the same 16X and 19X valuations. Currently, stocks are selling well below the low the end of this historical valuation band.
The 2020 and 2021 estimated S&P 500 operating earnings per share, as of March 9, 2020, were $174.44 for 2020 and $194.94 for 2021.
The S&P 500 has returned 9.6% over the past 28 years through March 12, 2020. If you exclude dividends, that's a 7.4% average annual growth rate. This is consistent with returns dating back to 1871, according to Jeremy Siegel's book, "Stocks For The Long Run." But the Coronavirus bear market has knocked the returns well below the long-term trendline.
From a Valentine's Day, February 14, 2020 all-time high of 3,38016, the S&P 500, plunged on fears of Covid-19 before rebounding Friday to close at 2,711.02.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal, and past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
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