The markets have given up their 2020 gains and are down for the year, the VIX index is at levels not seen since December 2018 and the S&P 500 is close to having a full-blown correction. And for now, at least, there’s no end in sight. Reports of coronavirus cases surging came through over the weekend and just as it was looking like the virus had been contained and was on the back foot, it’s taken hold in South Korea, Italy, and Iran.
The initial expected effects had been focused on a temporary slowdown in the Chinese economy and a knock-on effect of lower production to US companies with operations there alongside some kind of a decline in travel. However, we’re now seeing markets take it much more seriously this week and some industries in particular alongside individual names are taking a battering.
Companies on the frontline of demand are most susceptible to black swan events like this outbreak and the travel industry knows all about it.
The airline ETF JETS is at multi year lows after losing more than 15% of its value in the past two weeks. With no known cure or preventative medicine currently available, it’s understandable that travelers are slow to visit countries where the contagious virus is present. As a result, demand for flights is plummeting and airlines are struggling to properly build this downturn into their forecasts. Remember, no one had even heard of the coronavirus before the end of last year. Now more than 2,500 people have died from it in China, international sporting tournaments and events are being canceled and whole cities are in lockdown.
American Airlines (NYSE: AAL) who were already down more than 50% from 2018 highs coming into the start of this year, find themselves down a full 25% in the past two weeks alone. To put that into perspective, they’re back trading at 2013 levels. United Airlines’ (NYSE: UAL) stock is turning out to be a little more robust and is only down 14% since mid-February. However, on Monday the company pulled its entire FY20 guidance citing "heightened uncertainty surrounding the coronavirus outbreak, its duration, its impact on the overall demand for air travel and the possibility the outbreak spreads to other regions."
Cruise ship names are also having a horrible time right now. Norwegian’s (NYSE: NCLH) stock is down 35% from January levels as are Royal Caribbean (NYSE: RCL) and Carnival (NYSE: CCL).
For what it’s worth, from a technical standpoint there is an, albeit risky, argument for taking a punt in some of these names. Both Royal Caribbean and Norwegian shares are down at multi-year support levels while their RSI is at 18, indicating extremely oversold conditions. For the optimistic investor who believes the virus will eventually be contained, these could be absolute gifts of prices, if for nothing else than a temporary dead cat bounce. However, you’re effectively taking a punt on science so know the risks involved.
While the initial damage of the coronavirus to US stocks was somewhat limited to those on the frontline like airlines and cruises, the reports that came in over this past weekend meant that its reach started to extend into other industries. Apple, (NASDAQ: AAPL) which had been trading up at all-time highs as recently as last week, started to turn down last Friday and then gapped down a full 5% on Mondays open. Tuesday’s session saw it go even lower.
Apple relies heavily on Chinese manufacturing plants to make their products and on Chinese consumers to provide much of the demand for their products. With entire cities lockdown and people refusing to venture outside their homes, the industry has effectively stalled across much of the country. Semiconductor stock NXP (NASDAQ: NXPI), whose stellar earnings we covered earlier this week, finds itself down over 15% from the all-time highs it was flying at earlier this month. This turn in fortunes is been seen right across the tech sector and few names are safe as markets are emitting a strong risk-off attitude.
For now, it’s a case of hunkering down and protecting profits earned throughout previous months. There will be value plays to be had eventually, but don’t try to catch a falling knife.
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