Growing apprehensions regarding a second wave of coronavirus infection and Fed’s dull outlook for the economy sent the stock market tumbling on Jun 11. However, Thursday’s freefall shouldn’t unnerve investors as it spells better times ahead. Stocks have always rebounded after such massive selloffs, which makes investment in growth picks now a prudent decision.
June 11 Trading: A Brutal Selloff
The Dow Jones Industrial Average was down 1,861.82 points, or 6.9% to close at 25,128.17 on Jun 11 — its worst one-day decline since Mar 16, according to FactSet data. The blue-chip indexes’ all 30 components ended in the red, led by Boeing and Dow Inc., down 16.4% and 9.9%, respectively.
The broader S&P 500 ended down 188.04 points, or 5.9% to finish at 3,002.10. Massive selloffs in the energy and the financial sector dragged the broader index down. In fact, among its components only one closed in the green. The sole deviant was Kroger, up a meager 0.4%.
What’s more, both the Dow and the S&P 500 ended at their lowest level since May 26, per Dow Jones Market Data. The Nasdaq Composite also closed down nearly 527.62 points, or 5.3%, at 9,492.73, one day after the tech-laden index traded above the physiological milestone at 10,000. The index finished at its lowest level since May 29.
And as stocks fall, the CBOE Volatility Index better known as Wall Street’s “fear-gauge” advanced about 50% and touched its highest level since Apr 21-22, per FactSet data.
What Led to Extreme Bearishness?
Signs of an increase in coronavirus cases, and subsequently fears of a second wave of COVID-19 dented investor sentiment. According to Johns Hopkins University, the number of coronavirus infections have surpassed the 2 million mark, and more than 112,000 Americans have lost their life to the same.
Notably, the seven-day average of coronavirus cases rose in more than 20 cities in the United States over the past two weeks. Some are now blaming the move to reopen businesses without a proper coronavirus vaccine as the primary factor behind the rise in infections in key states including Texas, California and Arizona. Needless to say, that the pandemic had already disrupted supply chains, impacted corporate earnings and wreaked havoc on the economy.
Talking about the economy, the United States is officially in a recession. The National Bureau of Economic Research, recently, stated that the longest economic expansion in the history of the United States came to an abrupt end in February, and the coronavirus outbreak played a huge part in impeding economic growth.
By the way, the Fed’s dour outlook has a lot to do with the stock market selloff. The central bank’s updated policy decision and projections indicated that the policymakers expect the U.S. GDP to contract by 6.5% by the end of this year compared to last year. The Fed still expect jobless rate to remain elevated at 9.3% for the year, well above its long-term forecast of 4.1%.
But, let’s admit, that after a 40%+ rally from Mar 23 lows valuations for stocks became lofty and any vulnerable news such as rising cases of coronavirus and Fed’s grim outlook easily weighed on benchmarks.
How Does the Stock Market Tend to Perform After Nasty Drops?
For any investor, however, Thursday’s painful selloff is a harbinger of good times ahead. This is because stocks have a tendency to bounce back after a drop of at least 5%, per Bespoke Investment Group.
In the past, whenever the broader market index, the S&P 500 tumbled more than 5%, its performance improved considerably in the following week, month and year. In fact, the S&P 500 on average has rallied 2.14% the day after a drop of 5% or more, and ended on a positive note the next day 81.48% of the time. Take a look –
In fact, investment guru Warren Buffett himself believes that no matter how spooky the outbreak is, it’s not the time to dump stocks. Buffett believes one should not get caught up in daily headlines and that the outbreak will eventually subside.
Moreover, the historic financial aid from the U.S. government and the Fed to combat the negative coronavirus impact on businesses and livelihood should certainly play a crucial role in improving investor confidence.
5 Top Stocks to Add to Your Portfolio
Great Lakes Dredge Dock Corporation
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) provides dredging services. The Zacks Consensus Estimate for its current-year earnings increased 23.3% over the past 60 days. The company’s expected earnings growth for the current year is 23.3%.
The Hain Celestial Group, Inc
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) manufactures organic and natural products. The Zacks Consensus Estimate for its current-year earnings increased 8.2% over the past 60 days. The company’s expected earnings growth for the current year is 19.7%.
Murphy USA Inc.
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) engages in the marketing of retail motor fuel products. The Zacks Consensus Estimate for its current-year earnings increased 46.7% over the past 60 days. The company’s expected earnings growth for the current year is 68.3%.
Sprouts Farmers Market, Inc.
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) provides fresh, natural, and organic food products. The Zacks Consensus Estimate for its current-year earnings increased 26.5% over the past 60 days. The company’s expected earnings growth for the current year is 33.6%.
Enviva Partners, LP
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) produces and sells utility-grade wood pellets. The Zacks Consensus Estimate for its current-year earnings increased 14% over the past 60 days. The company’s expected earnings growth for the current year is 145%.
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