M2 BARRON’S March 16, 2020
tors go to Wikipedia to learn the definition
of pandemic, it’s a sign things aren’t normal.
All the stress can compress investors’
time horizons. Falling 2020 earnings esti-
mates start to dominate better potential
earnings in the future. The S&P 500 now
trades for less than 13 times 2022 estimated
earnings. Things should be back to normal
by then. It is also what stocks traded for
around the lows of 2002, 2016, and 2018.
That’s the what. The why is the easiest
question to answer. It is the virus—and the
fact that there are no good precedents to
figure out when the crisis will pass or how
many people will be significantly affected.
“I have purposefully stayed out of the
science,” Calvasina says. “I’m interested in
what the market is telling me.” And what
the numbers show her is the market is pric-
ing in a recession. “Last week the market
was trying to hold 2,700,” she notes. That
lines up with other 10% to 20% drops in
the aftermath of the 2008-09 financial cri-
sis. Those were market corrections. They
didn’t imply recession.
The S&P 500 dipped below 2,700 this
week before closing higher on Friday, after
a final-hour rally. The next negative mile-
post Calvasina is watching for is 2,300. If
the market breaks that level, then it is no
longer pricing in just a garden-variety re-
cession. It would signal worse things are on
the horizon.
Even during the depths of Thursday’s
9.5% decline, the index hit only 2,479, well
above her 2,300 barrier. As hard as it is to
believe, the market tells Calvasina that it
won’t be as bad as the financial crisis. The
market doesn’t expect a grinding, year-plus
slowdown accompanied by a 50% drop in
stock prices. (The average peak-to-trough
recessionary drop in U.S. stock prices is
about 30%.)
What to do next? The pros advise against
excessive inaction.
“Hiding in the market’s most conserva-
tive names was a nice idea three weeks ago,
but it isn’t the best idea today,” David Don-
abedian, CIBC U.S. private wealth chief
investment officer, tellsBarron’s. “Just focus
on good business fundamentals”—and don’t
switch to names with the lowest beta or
price/earnings ratio. (Beta measures a
stock’s underlying volatility and correlation
with the market.)
Calvasina agrees and is staying over-
weight in the industrial sector. “It is under-
performed recently, but the sun will rise on
the industrial economy again,” she says—
probably by the middle of 2020, she calcu-
lates. Calvasina also recently upgraded her
rating on the health-care sector, but not
because of the virus. Former Vice President
Joe Biden’s resurgence in the Democratic
presidential contest reduced the “political
risk” within that sector.
“This [volatility] will reverberate for a
number of months,” Smead adds. He has
40 years of market history under his belt.
He recommends shopping, too, but his
shopping list includes his favorite stocks—
which include home builders and banks—
and not hand sanitizer.
Buffett’s Next Move
Warren Buffett has famously said that in-
vestors “should be fearful when others are
greedy and greedy when others are fearful.”
With financial markets in turmoil, the
Berkshire HathawayCEO has the oppor-
tunity to follow his own maxim and make
what could be some lucrative investments,
as he did during the financial crisis.
Berkshire (ticker: BRK. A) had $128 bil-
lion of cash and equivalents on its balance
sheet at the end of 2019, giving Buffett am-
ple wherewithal to make some moves. A
patient Buffett is being vindicated after al-
lowing cash to build on Berkshire’s balance
sheet in the face of investor calls to pay a
dividend or buy back more of its own stock.
Berkshire was inactive in purchasing equi-
ties or entire businesses last year.
There are plenty of things that Buffett
Vital Signs
Friday's Week's Week's
Close Change % Chg.
DJ Industrials 23185.62 -2679.16 -10.36
DJ Transportation 7939.40 -1016.66 -11.35
DJ Utilities 762.60 -139.10 -15.43
DJ 65 Stocks 7519.60 -983.49 -11.57
DJ US Market 665.67 -70.04 -9.52
NYSE Comp. 10851.98 -1500.06 -12.14
NYSE Amer Comp. 1602.25 -547.52 -25.47
S&P 500 2711.02 -261.35 -8.79S&P MidCap 1546.75 -251.04 -13.96
S&P SmallCap 725.46 -141.74 -16.34
Nasdaq 7874.88 -700.74 -8.17
Value Line (arith.) 4738.95 -876.35 -15.61
Russell 2000 1210.13 -239.09 -16.50
DJ US TSM Float 27288.33 -2987.11 -9.87Last Week Week Earlier
NYSEAdvances 85 1,479
Declines 2,995 1,570Unchanged 5 28
New Highs 30 99
New Lows 2,535 809
Av Daily Vol (mil) 8,032.4 6,019.7
Dollar(Finex spot index) 98.38 95.95
T-Bond(CBT nearby futures) 176-210 179-220
Crude Oil(NYM light sweet crude) 31.73 41.28
Inflation KR-CRB(Futures Price Index) 140.84 155.85
Gold(CMX nearby futures) 1515.70 1670.80Start Investing Today! ibkr.com/goglobal
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