Kirk Spano Blog | Coronavirus Will Spur Much Deeper S&P 500 Correction | TalkMarkets
Change Analyst & Investment Advisor
I grew up in a middle class working family in Milwaukee.I remember long gas lines, the first home my parents bought and the recession of the early1980s. My parents sacrificed to put me through Catholic Schools at a time that Milwaukee Public Schools were beginning to fail. I also remember all of ...more

Coronavirus Will Spur Much Deeper S&P 500 Correction

Date: Tuesday, March 3, 2020 2:27 PM EDT

Summary

  • People ignore valuations until there are no more greater fools, then something makes valuations suddenly matter.
  • Coronavirus is the something making valuations suddenly matter.
  • With a very likely severe economic slowdown coming, it's appropriate to use the "R" word finally.
  • I believe that investors should expect what I have termed a "skip-straight recession" with two down quarters spread across a year or two.
  • Investors should sell the rallies in the stock market and not buy back until there's a real panic sell-off.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »

Last week I discussed that Coronavirus Is A Match That Lit The Overvaluation Tinder. That piece went over several stock market valuation measures. All pointed to an extremely high risk of a severe correction - think year-end 2018.

It's clear that suddenly the overvaluation in the stock market, particularly the S&P 500 (SPY) (VOO) matters, at least to some people. As usual, it's the smaller investor who is the slowest to adjust asset allocations. As noted in my 2020 Outlook: Euphoria To Despair, the very wealthy, particularly through family offices, have been dialing back equity exposure for over a year now.

For folks who still refuse to understand the severity of the COVID-19 Coronavirus, let me summarize. It spreads similarly as the flu, but is between 15x and 30x more deadly, depending on what type of healthcare you have available.

WHO Covid-19 Coronavirus

WHO Covid-19 Situation Report

The COVID-19 Coronavirus is likely to instigate an economic slowdown which could become a global recession. Consider the massive slowdown in China's economy already that accounts for a quarter of global economic output.

From the current, still overvalued, levels of the S&P 500, another 25% correction is growing in likelihood. It's past time for too many investors to take a very serious look at their risk tolerance and asset allocations. I'm reiterating that investors should completely dump the SPDR S&P 500 ETF (SPY), the Vanguard 500 (VOO) and similar funds.

Do Valuations Matter To You?

I have discussed for six quarters now that stock market valuations were very high. A single-digit percentage stock market correction has not changed that.

Stock Market Valuations

Jill Mislinski

An argument is often made that because interest rates are low, the stock market can sustain higher valuations. I would agree that is true, however, to what degree should be asked. Should the stock market be the third most highly valued in history?

Continue reading on Seeking Alpha.

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