Don’t be fooled by Tuesday’s big stock market jump. The coronavirus bear market won’t be over anytime soon. Instead, investors should brace themselves for things to get even worse before they get better.
That might sound pessimistic, but I’m just being realistic. I’d like for the stock market to take off immediately as much as anyone. However, there are three reasons why I think that stocks are more likely to fall even more than they already have before they bounce back in a sustained uptrend.
1. COVID-19 cases will soar
The sad fact is that cases of COVID-19 are going to soar over the next few weeks. Even with the drastic actions taken by governments, businesses, non-profit organizations, and individuals to “flatten the curve” and slow the spread of the novel coronavirus, a lot more people are going to be infected, with many becoming severely ill.
That’s not just my opinion; it’s what health experts are warning will happen. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID) since 1984, stated this week, “It’s certainly going to get worse before it gets better.” He said that shutdowns and working from home could be needed for eight more weeks and potentially longer as the number of COVID-19 cases in the U.S. skyrocket.
The stock market responds to the psychological state of investors more than anything else. If investors are fearful, stocks are likely to fall. And if a large number of Americans are diagnosed with COVID-19 in the coming weeks with a significant number of fatalities (which, unfortunately, seems likely), you can bet that investors will be fearful.
2. The impact of any government stimulus won’t be immediate
Tuesday’s big rebound resulted primarily from reports that the Trump administration was considering a massive government stimulus package to help prop up the economy during the coronavirus pandemic. It’s understandable why investors cheered the news. The package could pump close to $1 trillion into the economy through checks sent to individual Americans and financial assistance for businesses.
Both the White House and Congress would like to move quickly. However, what politicians want to do doesn’t always translate to what actually happens. There could be some political gamesmanship that prolongs how long it takes to finalize a deal.
More importantly, the impact of any government stimulus won’t be immediate even after whatever bill emerges is signed into law. While U.S. citizens and businesses wait for government financial aid, investors will continue to hear worrisome numbers about the number of COVID-19 cases. Bad news right now outweighs good news on the way for most people.
3. Next earnings season will be brutal
Analysts are only now beginning to crunch the numbers on just how much businesses will lose as a result of the coronavirus pandemic. Obviously, some sectors will be hit harder than others. Disney, for example, could lose nearly $500 million dollars from the NBA season cancellation alone. It seems reasonable to expect that the next earnings season will be absolutely brutal.
The first wave of earnings reports will begin to trickle in starting in mid-April. Over the next few weeks after then, most major companies will report their quarterly updates.
Stocks almost always fall when earnings decline or when companies revise their guidance downward. Look for many companies to report lower earnings in their first-quarter updates and lower their full-year and second-quarter guidance. Even if the stock market rallies somewhat over the next few weeks, I suspect the dismal earnings season will nip the rebound in the bud temporarily.
What investors should do
With the coronavirus bear market likely to last longer than anyone wants, is it OK to buy stocks now? Absolutely. If you’re a long-term investor, buying high-quality stocks at current prices will almost certainly enable you to make a great return over the coming years.
But my suggestion is to ease into buying stocks. One great idea is to invest part of your money every time you receive a paycheck, whether that’s weekly, biweekly, or monthly. If you have a big cash stockpile, spread your investments of the money over several weeks or months.
As for what kinds of stocks to buy, nearly every sector has some great bargains right now. I personally like healthcare stocks, especially shares of companies that have excellent long-term growth prospects and offer products that will be in high demand both now and in the future.
Teladoc Health has been one of my favorites for quite a while. I like it even more now with telehealth gaining widespread adoption in the wake of the coronavirus pandemic. My view is that telehealth will continue to pick up momentum. As the largest provider of telehealth services in the world, Teladoc is likely to benefit from this trend big-time.
I also am bullish on Bristol Myers Squibb. The big pharma stock has been beaten down, but its business really shouldn’t be impacted very much by the COVID-19 crisis. BMS has several blockbuster drugs with fast-growing sales and a pipeline that’s loaded with potential winners thanks to its acquisition of Celgene last year. As icing on the cake, the company’s dividend yield now stands at 3.5%.
Again, though, you can find a lot of great stocks to buy now and over the coming months. The coronavirus bear market will almost certainly get worse before it gets better. But it will get better.
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Keith Speights owns shares of Bristol Myers Squibb, Teladoc Health, and Walt Disney. The Motley Fool owns shares of and recommends Bristol Myers Squibb, Teladoc Health, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.