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Will Covid-19 Crisis Be Short-Lived?

(Friday, March 13, 2020,  10:00 p.m. ET) — After plummeting 26.7% from its all-time record high, set just three weeks ago, the U.S. stock market soared 9.3% on Friday. Financial and economic indicators signaled that the Coronavirus crisis could be short-lived.

Forecasts for growth remained bright, according to The Wall Street Journal's monthly poll of 60 economists and the Federal Reserve Bank of Atlanta. In addition, stock prices have fallen well below long-term historical valuation and return norms.

The Atlanta Fed on March 6 updated its GDPNow calculation of growth in the current quarter. Its algorithm indicates the first quarter of 2020, despite Coronavirus will grow by 3.1%. This forecast was made a week ago, before sports schedules were postponed but after the outbreak.

Meanwhile, the consensus forecast of economists surveyed in early March by The Journal was for V-shaped contraction. over the four quarters ahead. They predicted negative growth in the second-quarter and then a third-quarter recovery back to the pre-Covid-19 growth rate of 2%.

By historical financial benchmarks, stocks are undervalued, after being overvalued just three weeks ago.

This chart shows the actual price of the S&P 500 index in black. The upper red line shows the value of stocks if they had been priced at 19 times their expected 12-month profit and the lower red line shows the value of stocks priced at 16 times their expected 12-month profit.

The dotted red lines show the expected profits on the S&P 500, applying the same 16X and 19X valuations. Currently, stocks are selling well below the low the end of this historical valuation band.

The 2020 and 2021 estimated S&P 500 operating earnings per share, as of March 9, 2020, were $174.44 for 2020 and $194.94 for 2021.

The S&P 500 has returned 9.6% over the past 28 years through March 12, 2020. If you exclude dividends, that's a 7.4% average annual growth rate. This is consistent with returns dating back to 1871, according to Jeremy Siegel's book, "Stocks For The Long Run." But the Coronavirus bear market has knocked the returns well below the long-term trendline.

From a Valentine's Day, February 14, 2020 all-time high of 3,38016, the S&P 500, plunged on fears of Covid-19 before rebounding Friday to close at 2,711.02.


The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal, and past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. It does not take into account your investment objectives, financial situation, or particular needs. Product suitability must be independently determined for each individual investor.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.


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Index
What Investors Should Expect And A Business Owner Alert 
Is the Coronavirus Bear Market Over?
What's An Investor To Think Now?
Despite Covid-19, Signals Of Economic Health Continue
Covid-19: Facts And Perspective For Investors
Economists Expected Q1 U.S. Growth Of 1.6%; It's 2.6%! 
Stocks Close At New High As Business Owner Optimism Surged
Retirement Revolution Unexpectedly Is Boosting Economy
Coronavirus Scare Reveals The Nature Of Stock Market Risk
Leading Indicators Slightly Off Again
S&P 500 Breaks All-Time Record Again
Steady Economy Briefly Drives Dow Beyond 29,000
Why Stocks Shrugged Off Iran Escalation
A Spectacular Year For Stocks
A Case For A Bull Market In 2020

This article was written by a professional financial journalist for Excomp Asset Management, Ltd. and is not intended as legal or investment advice.

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