Is The Acute ETF & Stock Selloff An 'Overreaction' Or Justified?

Wall Street’s record-long bull run ended on Mar 12. As the broader market saw rampant dumping of stocks in the wake of the coronavirus, the most recurring question on everyone’s mind is — is the acute selloff justified?

Obviously, there are divided views on this. Goldman Sachs (NYSE:GS) warns U.S. markets will encounter steeper decline going ahead. Previously, Goldman predicted zero percent earnings growth this year. Investment management firm Pimco expects a “technical recession” in the first part of the year. TS Lombard forecasts a “major recession” globally, and Bank of America (NYSE:BAC) Global Research slashed its global growth forecast to 2.2%, per an article published on CNBC.

But JPMorgan Chase (NYSE:JPM) believes that “the market has gone ahead and priced in too severe of an adverse scenario.” “A recession is not inevitable,” says chief economist of PNC Financial Services Group (NYSE:PNC). Even if we have a recession soon, the scale of it would be less severe than the Great Recession, per the economist. Morningstar believes that market selloff is a ‘gross overreaction’ to a ‘severe but manageable flu’ (read: Is the Virus-Induced Stock Selloff Overdone? ETFs to Buy Now).

Why a Vaccine & Advanced Healthcare Could Check the Selloff

We should not forget that the economy was on a strong footing before the virus attack. Americans’ savings were just 3.6% of their income at the end of 2007, while households now save at an 8% rate. Unemployment rate is at a 50-year low level.

With the Fed, the BoE, Australia and Hong Kong announcing rate cuts, the ECB launching a modest stimulus package, the IMF offering a $50-billion aid, President Trump signing an $8.3-billion spending package and the Fed injecting about $1.5-trillion liquidity into the market, one thing is clear — global powers are acting promptly to alleviate the virus-led fallout.

But with people on quarantine and supply shocks causing economic slowdown, such measures (which are mainly meant to boost demand) will likely prove to be of little help. What we need now is a vaccine. Morningstar forecasts that as vaccines hit the market and treatments improve, the economic disturbance will be equal to a “milder pandemic,” as quoted on CNBC.

Morningstar expects “even lower fatality rates for developed countries (more ICU beds per capita, best practices) and the working age population (the disease is most severe in the elderly)” as well as sees “reason for optimism surrounding vaccines and treatments.”The recovery rate is not that grim as of now, as depicted below.

Source: worldometer

The research house went on to elaborate that “equity valuations on average should be unscathed” if its long-term projections on GDP comes accurate. Morningstar views a “weighted average hit of 1.5% to 2020 global GDP and 0.2% to long-run global GDP.”

What’s the Real Worry?

We need to see a slowdown in the spread of the virus. This only can offer some support to the broader market. But the problem is that the new cases reported lately outdid new recoveries. If it continues, some more selloffs may be in the cards.

Source: worldometer

Bottom Line

In a nutshell, it is probably better to stay on the sidelines given the severity of the situation. One can track the progression of the spread of the virus as well as total cured cases before investing in the stock market.

Till then, play safe with short-term U.S. treasury ETFs like iShares Short Treasury Bond ETF (ASX:SHV) and hybrid ETFs like Pacer WealthShield ETF (ZI:PWS) . Inverse Dow Jones ETF like ProShares Short Dow30 DOG might make you rich as the Dow Jones has been extremely vulnerable during the virus turmoil (read: ETF Areas to Mark as Coronavirus Snaps Dow's 11-Year Bull Run).

Investors with a long-term view can also bet on large-cap value ETFs like Zacks Rank #2 Vanguard S&P 500 Value ETF VOOV and iShares Core Dividend Growth ETF DGRO. VOOV and DGRO yield 3.24% and 2.67% annually (as of Mar 12, 2020).

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