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Is it the Right Time to Enter the Stock Market? Let's Find Out

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Wall Street took a tumble on Feb 24, following news that the coronavirus outbreak is taking the shape of a global pandemic with its effects clearly visible in 30 countries apart from China. As IMF and several economists had foretold uncertainty regarding global economic growth dented investor confidence severely. Rapid shifting of funds from risky equities to safe-haven assets like U.S. government bonds and bullion like gold resulted in stock market rout.

With the overall stock valuation taking a hit of almost 5% in the last five trading days and rougher patch ahead, the question on every investor’s mind is whether this is the right time to enter the stock market. Notably, several economists and financial experts were concerned regarding overvaluation of global equities.

Stock Markets Tumble Globally   

On Feb 24, the three major stock indexes of Wall Street — the Dow, the S&P 500 and the Nasdaq Composite — declined 3.6%, 3.4% and 3.7%, respectively. Notably, this is the first instance of all three major indexes shedding more than 3% in a single day since Dec 4, 2018. In fact, the Dow declined 1,031.61 points, marking historically third highest daily decline on point basis.

Other important global stock indexes like pan-European Stoxx 600, South Korea’s Kospi, Hang Seng of Hong Kong and Australia’s S&P/ASX 200 fell 3.8%, 3.9%, 1.6% and 2.3%, respectively. Italy’s stocks fell 5% on an average owing to the coronavirus outbreak.

In the United States, the Dow, the S&P 500 and the Nasdaq Composite tumbled 4.9%, 4.6% and 5.2%, respectively in the last five trading days. Year to date, both the Dow and the S&P 500 have entered the negative territory with a decline of 2.02% and 0.15%, respectively. However, the Nasdaq Composite is still in the green with a gain of 2.8%. Technically, both the Dow and the S&P 500 breached 50-day moving average lines, known as short-term support level.

Is it the Right Time to Buy Stocks?

Although a group of industry watchers have cautioned that the worse is still not over, they claimed are of the opinion that the recent stock market downturn as a welcome correction. These experts are of the view that another 5% or more correction in stock valuation is likely in the near term.

However, historical evidence paints a different story. In the past 10 occasions, when the benchmark S&P 500 index fell 3% or more in a day, it rebounded 1.83%, 2.08% and 12.97% after a week, a month and a year, respectively.

Similarly, for the blue-chip Dow 30, the index rebounded 2.07%, 2.93% and 12.52% after a week, a month and a year, respectively, following a decline of 3% or more in a day.

A Comparative Analysis

Only time will tell if history will repeat itself or not. Meanwhile, we can do a comparative analysis of the current situation and its possible impact.

One cannot deny that the coronavirus epidemic’s scale and severity eclipses the previous SARS epidemic. The IMF recently predicted that global growth rate will be impacted by 0.1% while China’s growth rate will decline by 0.4% due to the outbreak.

Some economists have forecast that first-quarter 2020 U.S. GDP growth rate may come around 1% as several large businesses have cast doubts on future prospects. As a result, Wall Street is likely to experience further volatility in the near term.

Meanwhile, the U.S. economy is still on a stable footing despite growing for historically longest more than 10 years. CNBC reported that legendary investor Warren Buffett said the coronavirus spread has softened up the U.S. economy but noted growth is still healthy. “Business is down but it’s down from a very good level” said Buffet.

The U.S. stock markets are the best destination for investors. The gigantic size of the U.S. economy has given it a clear upper hand over other markets, which will enable it to counter coronavirus-led short-term fluctuations.

Finally, the Fed has reiterated its commitment to do whatever needed to support economic expansion and not raise interest rate until the inflation rate, which is currently at just 1.6%, crosses the Fed’s target level of 2%.

Per the CME FedWatch, at present, there is a 25% chance for a quarter basis point rate cut by the central bank in March. Notably, this probability was 11% at the end of last week and less than 4% a month ago.

How to Invest

At this juncture, it will be prudent to invest in blue-chip stocks with a favorable Zacks Rank that are still in the green year to date despite facing recent downturn. These stocks are also part of either the S&P 500 or the Nasdaq Composite. These stocks witnessed strong earnings per share estimate revisions in the past 30 days and have strong growth potential.

These corporate behemoths have very stable business models and they are regular dividend payers, which will act as income stream for investors. All these stocks carry either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Six stocks namely, Microsoft Corp. (MSFT - Free Report) , Apple Inc. (AAPL - Free Report) , International Business Machines Corp. (IBM - Free Report) , Intel Corp. (INTC - Free Report) , McDonald's Corp. (MCD - Free Report) and The Coca-Cola Co. (KO - Free Report) fall in this category.

The chart below shows the price performance of the above-mentioned six stocks year to date.


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