Opinion: Stock Market Drawback Creates Opportunity, but Risks Remain With Coronavirus and Oil
Concerns over Coronavirus and a substantial dive in oil prices have sent the stock market on a wild ride in a mostly down direction. Lower cost in stocks provide a buying opportunity for long-term investors. Before jumping in, one should first evaluate the known risks and opportunities in the current environment. It’s also an excellent time to re-assess your portfolio. Depending on the sector, adding to current positions may not be the wise move.
The biggest concerns with the coronavirus are the unknown.
Over the weekend, Italy saw their fatality numbers climb 57% in a single day from 233 to 366. The number of deaths may currently be far less than common flu on an annual basis but has already had a substantial impact. In some regions of Italy, hospitals are already running at 200% capacity, and 25% of the county is in lockdown under a virtual self-quarantine.
The spread of the virus in Italy was rapid. If the United States were to experience a similar fate as Italy, the economic ramifications would be far-reaching. These unknown projections are what has rattled investors’ nerves.
Tom Bossert, who was Trump’s homeland security adviser until he was ousted in 2018, belives there is a great reason to be concerned.
“We are 10 days from the hospitals getting creamed,” Bossert told NBC News on Tuesday. Bossert was never replaced, and Trump eliminated the national security council jobs related to disease outbreaks.
Bossert also sounded the alarm in the Washington Post. “Simply put, as evidence of human-to-human transmission becomes clear in a community, officials must pull the trigger on aggressive interventions,” Bossert wrote. “Time matters. Two weeks of delay can mean the difference between success and failure. Public health experts learned this in 1918 when the Spanish flu killed 50 million to 100 million people around the globe. If we fail to take action, we will watch our health-care system be overwhelmed.”
At the moment, it’s impossible to assess how far the virus has spread in the U.S. As of last Friday, less than 2,000 people nationwide had received a test. Individuals infected with the virus can be highly contagious and not yet be symptomatic. The virus also presents itself to varying degrees. With a lack of test kits, only the most severe are likely to be tested, while those that are affected less severely are likely never to be tested with limited testing.
The World Health Organization projected a fatality rate as high as 3.4%, 34 more times than the common flu of 0.1%.
There is good news. It appears the 3.4% rate may only take into account the most severely affected, as those patients are the ones most likely to be tested.
As of last week, South Korea has had 6,000 Coronavirus cases but had had a fatality rate closer to 0.6%, according to Business Insider. The lower fatality rate is likely because South Korea has tested 140,000 people and have detected far more cases of patients who the virus has had a much milder effect.
South Korea has also seen success at dramatically lowering the spread of the virus with social isolation.
While social isolation means less travel, it also leads to less fuel consumption. Meanwhile, Saudi Arabia and Russia have increased production in a price war. More supply with lower projected consumption has sent the price of a barrel of crude oil to less than $30 a barrel.
The lower cost of fuel may soon reflect in a lower price at the pump, but is hugely problematic for many oil companies saddled with debt they are struggling to pay off.
Saudi Arabia may intentionally be driving the price lower because they see that several U.S. companies may be vulnerable.
On Monday, Forbes addressed the growing concern that a more significant number of energy companies may not be able to weather the storm. “Energy and related bankruptcies that were estimated to rise in 2020 will likely accelerate a few notches. According to Haynes and Boone’s Oilfield Services Bankruptcy Tracker, there were six (6) new bankruptcies in the oilfield services area in the fourth quarter of 2019. Up until this point in 2020, Pioneer Energy Services is the only major oilfield services company to enter Chapter 11 bankruptcy. That’s almost undoubtedly going to change soon.”
The bad debt that threatens several oil companies has similarities to the debt that lead to the mortgage crisis but on a much smaller scale. The real concern is if the number of bankruptcies is far higher than expected, it would have a significant impact on the energy and banking sector.
At this time, it would not appear that there isn’t the political will to bail out oil companies.
Many members of the Democratic-controlled House would likely see a vote to bail out these companies as a Scarlet Letter held against them by environmentally-minded constituents who already seek to replace oil with renewable energy. These lawmakers and voters would likely see a failing oil sector as an opportunity to hasten that goal. They may even view the financial collapse of several oil companies as beneficial as Trump has tied his success to the stock market and attacked renewable energy.
While oil and other companies that support the industry may provide more risk than usual, other companies could see a benefit with less travel and more quarantines.
Digital media companies will likely see a boost in subscriptions and movie purchases. Amazon (AMZN) is not only a digital provider but could see the additional benefit of more people shopping at home.
Social networking sites like Facebook (FB) and Twitter (TWTR) may see a boost in traffic as people are home and turn to their platforms for information.
Companies that provide home goods such as toilet paper are likely to see an uptick in sales in the coming quarter. Fear of quarantine has led to individuals stocking up on this commodity. Toilet paper, however, is non-perishable. The same companies that saw revenue increase may see lower sales the next quarter as consumers use home stockpiles instead of purchasing more.
Dividend stocks are certainly more attractive. A dip in their price creates an opportunity to earn a higher return for new investments. Companies that pay dividends also tend to be on a more solid footing. With the pullback, some dividend stocks provide an excellent opportunity for income and growth.
Low-interest rates also provide an opportunity. The Feds cut interest rates by a .50 point last week. For those with excellent credit, this cut will likely reflect in a chance to refinance homes at interest rates below 3%. If you were soon looking to sell a stock for income, you might want to consider a home equity loan instead. You could keep the money on the sidelines for expenses, or take the risk and put a portion not needed now in dividend-paying stocks. The dividends will likely come close to offsetting the interest while providing time for stocks recently hit to rebound before selling. Proceeds from a future sale can be used to pay off the loan.
Disclaimer: Dan McLellan is not a financial planner. This article is his opinion and should not be viewed as financial advice.
Follow Dan on Twitter @sandiegosports.
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