Fortune - USA (2020-04)

JANUARY 2020 FEBRUARY

0

5

10%

NASDAQ

INDEX

S&P 500

INDEX

THE CORONAVIRUS SENT STOCKS PLUMMETING

FROM THEIR HIGHS IN FEBRUARY ...

MARCH

SOURCE: S&P GLOBAL

18 FORTUNE APRIL 2020

THINK BACK TO a simpler time.

For instance, January and Feb-

ruary. Though it seems distant now,

the S&P 500 hit its all-time high of

3394 on Feb. 19. “The stock markets

previously had priced in a Goldilocks

scenario and entered the year with an

elevated price-to-earnings multiple,

providing little cushion,” says Jared

Franz, an economist at investment

giant Capital Group. Then came the

coronavirus.

As the effects of the coronavirus

continued to spread throughout late

February and March, the stock market

sustained a series of blows. Investors

were not only plagued by uncertainty,

they also began to reassess the rich

premiums they had been paying for all

sorts of assets. And once they started

asking “How much is this market

really worth?” the answer was bleak

indeed. “In the past cycle, the elixir

was that when the Fed eases, the price

of risk assets goes up,” says Liz Ann

Sonders, chief investment strategist

at Charles Schwab. “That narrative is

now undergoing an epic shift. Credit

is tightening even though rates are

falling, and that’s hitting valuations.”

The bedrock metrics show one

thing for sure: Even after the repeated

drops, stocks have simply gone from

outrageously overpriced to overpriced.

The coronavirus was the catalyst that

kicked off the current

cycle of doubt, but there’s

another factor at play too:

For most of 2019, stock

prices roared ahead while

earnings stalled, creat-

ing a mismatch between

inflated valuations de-

pendent on rising profits

and profits that hit a wall.

And, says Franz, that wall

has only grown higher:

“Earnings expectations for

the S&P 500 were already

muted and have come

down further given poten-

tial supply disruptions”

caused by the coronavirus

outbreak.

At the S&P 500’s mid-

February summit, the

price-to-earnings ratio

stood at 24.2, based on

S&P projected 12-month

trailing earnings, through

Q1 2020, of $140. That’s

21% above its 20-year

average of roughly 20,

and almost 40% over the

70-year norm of 17.5. The

steep drop of 19% through

March 9 lowered the

multiple to 19.6—near the

average of the past two de-

FINANCE

Riding a

Roller-Coaster

Stock Market

With each new lurch,

investors are trying to make

sense of the big question:

How low will this market go?

BY SHAWN TULLY

BND.W.0420.XMIT.indd 18 FINAL 3/10/2020 6:48:39 PM