It has happened again. On Thursday the Dow Jones Industrial Average fell 2,352 points, which was the largest single day stock market point crash in history. Of course the old record only lasted for three days, because on Monday the Dow dropped 2,013 points. And on Wednesday, we actually witnessed the third largest single day stock market point crash in history. So the three worst days in the history of the U.S. stock market (on a point basis) have all happened this week. On a percentage basis, the stunning decline that we witnessed on Thursday was the worst day for the Dow since the horrifying market crash of 1987. Wall Street is in a tremendous state of panic right now, and nobody is quite sure when this will end.
Needless to say, this frenzy of selling is being driven by fear of the coronavirus…
“The coronavirus is scary and people don’t know what to expect,” said Kathy Entwistle, senior vice president of wealth management at UBS. “It’s like the tsunami is coming. We know it’s going to hit any day and nobody knows what the outcome is going to be.”
In the last 48 hours, the NBA, the NHL, Major League Baseball and Major League Soccer have all suspended their seasons because of COVID-19. Public gatherings of all sorts are being canceled or postponed all across America, and we are seeing “panic buying” at major retailers like Costco that is absolutely unprecedented.
But we still don’t know if this is going to evolve into a major pandemic that is going to kill millions of people. Right now there are less than 1,400 confirmed cases in the U.S. and less than 100 deaths.
If we are witnessing this much panic now, what will happen if millions of people do actually start dying?
Stocks should not be falling this rapidly yet, but of course they should have never gotten so high in the first place.
And even after all the carnage that we have already witnessed, stocks are still extremely overvalued.
In order for stock valuation ratios to return to their long-term averages, we would need to see the market fall another 20 to 30 percent.
But if this coronavirus pandemic does eventually become what many are fearing, stock prices will eventually go way below their long-term averages.
These are very strange times, and I have a feeling that they are about to get a whole lot stranger.