David Sharek Thinks the Coronavirus Bear Market is Over

Index (Symbol)

S&P 500 (.SPX)



Data is as of
March 24, 2020
Sharek’s Take

David SharekI Think the Stock Market will Bottom Today

The S&P 500 has dropped from a high of 3394 on February 19 to 2237 yesterday, March 24. That’s 34% in just under five weeks. Stocks and bonds have gotten hit hard as the Coronavirus (COVID-19) spreads around the world.

I think we are at the market bottom and stocks will rally from here. Here are my reasons why:

Coronavirus Medication is Now Available

There are numerous drugs being used overseas to cure people who are sick. I’ve known there were cures for COVID-19 this since Tuesday March 10th after I watched this video. Hydrochloroquine and choloquine were in hospital guidelines for treatment in South Korea.

There are now multiple drugs that are curing people from the Coronacirus, including one from Gilead Sciences and one from a company in Japan. The cures aren’t the problem. The problem was getting the news out.

News of a cure was circulating on various websites. But without FDA approval, many Americans were sceptical.

Trump’s Call on Chloroquione May Have Won Him the Election

The Coronavirus-cure news wasn’t mainstrem until President Donald Trump mentioned it in a press conference on Thursday March 19th. He claimed choroquine was approved from the FDA for Coronavirus, but it was later revealed this wasn’t approved for this virus, but for malaria. Trump knew this, and said the drug wasn’t gonna hurt anybody (true).

This move by Trump shifted focus the FDA to get a quick approval. This takes time, and a group of participants to test. 1000 people are needed for Gilead’s drug to pass Phase 3 testing.

Last week Regenereon’s CEO was on CNBC saying the big drug companies are collaborating with the government to test these drugs which have been prescribed in South Korea and China. He said we should know something this week.

New York Will Use Medication, Hospitals Won’t Be Overwhelmed

Meanwhile, the federal government has sent 70,000 doses of hydroxychloroquine, 10,000 of Zithromax, and 750,000 of chloroquine to New York City to deal with the crisis. Cases have been soaring in New York, and there’s fear of a shortage of hospital beds and ventilators. But if you give the patients the medicine and they get cured (48 hrs?) there will be less strain on hospitals.

Today is the day the drugs are expected to be administered in New York City. I expect people to be cured as they have been in France, South Korea and China.

With death rates lower, the focus shifts from fear of death to fear of running out of money. People want to go back to work.

When Will Things Reopen?

Trump has a 15 day trial period of people staying at home. We are in day 8, and next Tuesday he will make a decision to loosen regulations.

It seems like Trump will reopen America for business, with the back-to-work day likely to be April 6th. That’s a three-week self-quaranteen.

Investors are now more aware of this situation. Certainty is higher than three weeks ago. And with the stock market down 1/3rd, smart money is looking to buy.

One Year Chart
Here’s a one-year chart of the S&P 500, what most investors consider to be the best barometer for the stock market.

In this chart, quarterly profit growth is along the bottom, with Estimates for the next two qtrs bottom/right. These numbers from the last 4 qtrs aren’t special. And the qtrly Estimates look overly optimistic. There’s no way the S&P makes $170 this year.

The market’s P/E is 13 now. It was 20 when I did this chart last qtr. So stock prices are low.

In the Annual Profits column, note profits have been up every year since 2011. That’s very good. We will no-doubt have lower profits in 2020.

Earnings Table
Here in the Earnings Table we take a deeper look into the fundamentals. When you read this table, figures taken that qtr go from left-to-right.

Notice that during the last four qtrs the S&P 500 wasn’t growing profits very fast. Over a long period of time profit growth is often correlated to stock growth. Sometimes profit growth = stock growth. So these qtrly profits for the S&P 500 meant very low expectations for growth in the Vanguard 500.

Annual Profit Estimates have decreased a bit in each of the last three qtrs, but I don’t have a clue as to what the S&P will earn this year. It could be $120 (not $169.61). We all know company profits will be poor this year. What’s important now is 2021.

Next year’s economy should be strong. Notice in this table I’m comparing quarterly profits year-over-year. So if profits are poor the next four qtrs, it makes next year’s comparisons easy. So in the Summer of 2021 we could be looking at headlines of 20% to 40% profit growth — and a bounce back in the economy.  

Qtrly profit Estimates for the next 4 qtrs are 1%, 2%, 3% and 3%. Again these are too high. Analysts haven’t updated their information (obviously).

Fair Value
The S&P usually has a P/E between 15 and 20. At the beginning of 2020 it had a P/E of 20. That was too high in my opinion. Notice the S&P has had a P/E of around 18 the past three years.

Since interest rates are low, there’s not much competition for your money from bank CDs (or bonds in general). Stocks are more attractive than bonds right now, and the market deserves a higher P/E than normal. This thesis is from Jeremy Siegel, Professor of Finance at the Wharton School and Author of Stocks for the Long Run.

The market’s P/E is currently 13. But that assumes the companies within the S&P 500 will earn $169.61 this year. I highly doubt that.

What IS possible is the S&P might make $170 next year. And I think a P/E of 18 is fair. So maybe the 2020 estimate of 3053 is more accurate for 2021, and we lose a year of growth.

I think there’s huge upside now with stocks so low.

Bottom Line
When we see a ten-year chart of the S&P 500, both profits and the index have grown 7% per year during the last decade. I expect the S&P to grow 6%-8% long-term.

I’m biased, but I think it’s better to be in stock right now. Lots of companies are having troubles paying bills with no income. Rents are due, and that might bring down the commercial real estate space. People work from home now. That could lead to banks holding bad loans. The energy market is also poor with travel down. Some retailers will go bankrupt.

According to my analysis, the market (measured by the S&P 500) is extremely undervalued. But I think this is a stock pickers market. Know what you own.

The stocks that lead the market higher are likely companies thriving in the current environment. People around the world are spending almost all their time at home.

  • Software stocks that assist people working-from home are doing great.
  • Online retailers that deliver consumer goods to homes are thriving.
  • Dollar stores that sell food are hiring.
  • Restaurants that do take-out and delivery don’t have competition from bars and sit-down restaurants which are closed across the U.S.
  • And lastly, online education is thriving as people train themselves in a Coronavirus world.