There is nothing so damaging than fear itself, paraphrasing President Roosevelt. The irrational behavior caused by the fear clouds people's judgment. The Investor's fear of Coronavirus are smashing financial markets.
Please do not get me wrong; I fear it too. But, and there is always a but, investors need to focus on the possible worst scenario vs. where the market level is right now.
Let's for a moment think, what could be the most likely scenario for the U.S. economy.
As a hypothetical exercise, let's imagine that we lose two months of earnings for the 2020 year for every company included in the S&P 500 index, or -16% of reduction on profits. Like everybody stays at home for two months, and nobody works at all. It might happen, like what China recently did.
After a financial calculation of present value (see the details at end), for a very high margin of error estimated, the fair value of the S&P 500 index under such a scenario would be around 2,700 to 2,900.
We find the S&P index below these levels currently. How long will it be below those levels? How low will it reach? What will cause it to revert its path? Those are tough questions to answer in the short term.
All that we might reasonably expect it is that in the long term, sooner than later, it will pass. When should we act? That is a particular decision, depending on your needs for immediate cash flow and your appetite for risk.
If you are unsure, I can only recommend you look for professional advice. The fear is the worst adviser!
- Michele Lopez
The financial calculation details of S&P index level:
A couple of financial minutiae first for the S&P index. Current earnings estimates for 2020 are at 177 USD. We will adjust earnings down -16% for 2020. We will estimate for 20 years forward with a low rate of growth (like 2%), and we will use a discount rate, such as 2.5%, higher than the ten-year treasury rate (0.8%) rate.