Before we continue with this dour and foreboding article, I just want to say that I’ve hit a hat-trick this week for animal metaphors. I started Monday with a bear market piece, followed it up Tuesday with a dead cat bounce article, and here we are capping the week off talking about a black swan. I’m the Disney (NYSE: DIS) princess of bad stock market news.
In a William Wallace-esque call to arms to its innumerate fleet of start-ups, disruptors, and wanna-be unicorns, venture capital firm Sequoia Capital has called the coronavirus “the black swan of 2020”. The letter, which you can read in full here, pulls no punches when it comes to the long-term effects the virus will have on the global economy, toeing the line between ‘batten down the hatches’ and ‘per aspera ad astra’.
It highlights some of the great companies born from strife: Cisco (NASDAQ: CSCO) from the rubble of 1987; Google (NASDAQ: GOOG) and Paypal (NASDAQ: PYPL) emerging like phoenixes from the ashes of the Dot-Com crash; and Square (NYSE: SQ) forged from the fire of the Global Financial Crisis. Apart from a fire in my belly and a sudden urge to go out and start my own multi-billion dollar company, one of the take-aways from this rip-roaring speech was the level at which Sequoia placed our current situation. Comparing our current economic turmoil to the three biggest market events of the past 40 years shows the wariness of the firm, who in their own words, has “weathered every business downturn in the last fifty years.”
Is a Bear Market On the Way?
So, as investors do we take heed of Sequoia’s warning and run for the hills, pockets full to the brim with t-bonds and bullion? Or is it bargain-hunting season, as stocks you’ve been watching that have been overpriced since the 5th of forever finally descend to a reasonable price? The answer depends on so many factors. Your age, your risk tolerance, the ratios of your portfolio, and the amount of cash you have at hand all play a factor in your decision-making process. If there’s a gold watch in your near future, maybe the current volatility of the stock market isn’t for you. If you’re in your 20s and just started your investing journey, a market like this should make you salivate. Horses for courses and all that.
Companies with exposure to China will see a long-term impact on their production lines. The outbreak of the virus has spurred Apple (NASDAQ: AAPL), Google and Microsoft (NASDAQ: MSFT) to diversify their supply chains, reducing their reliance on China, which has been greatly exposed over the past month. The effect of this could carry on long past Q1 2020, and investors must be wary of this. However, it is not all doom and gloom on Wall Street: stay-at-home stocks like Zoom (NASDAQ: ZM), Teladoc (NYSE: TDOC), and Netflix (NASDAQ: NFLX) have been flourishing in 2020, up 83%, 60%, and 15% respectively, in comparison to the S&P 500 (NYSEARCA: VOO), which is down 6% since the start of the year.
There is every chance the market will sink further. The S&P needs to drop a further 10% to hit bear market territory, which in today’s current pandemonium could mean 3 days of trading. The likelihood of our precious bull market ending his reign is high, but that doesn’t mean there won’t be opportunities that arise from the chaos. Taking a final quote from Sequoia’s war-cry, “Many of the most iconic companies were forged and shaped during difficult times.” The same thing goes for investors.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Apple, Microsoft, Zoom, Netflix, Teladoc and Square. Read our full disclosure policy here.
Content Manager at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.