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Coronavirus, World Events, & Your Money

As of today, the S&P500 is down about 20% from its high set earlier this quarter and the Coronovirus has spread throughout many US cities and entire regions in Europe and Asia. While the world is witnessing various subsets of its economy shut down for public health reasons, we are observing various responses in different economic areas. As one example, the Saudis (in an effort to maintain positive cash flow in their region during this period of record setting reduced demand for oil) have launched a campaign to produce the lowest priced oil in the world, in hopes of gaining market share from regions usually supplied by Russian oil. Since energy companies make up a noticeable component of the S&P, it has put further drag on stock prices. In the US, we see travel, entertainment and sports industries announce cancellations or "no fan" events which will take a bite out of 2020 profits for certain. The big question that everyone wants answered is: “When will this downdraft end?” Although no one really knows the answer, I think that it is helpful keep in mind how the market prices stocks on the exchanges. The key variable is projected earnings. Stocks sell at a multiple to the projected earnings of the company for the next 12-18 months. Historically investors in the US pay about 17x earnings for stocks on the S&P. In times where optimism and positive events are happening in the economy, investors may get excited and pay more. We saw S&P multiples move up to 19.4x earnings in late January which, in our opinion, was mostly unfounded excitement. In times where fear and worry grip investors, such as in the midst of the financial crises, we saw investors only willing to pay 12x earnings for stocks. So there are ultimately 2 main factors, forward projected earnings AND price to earnings multiples, that drive the price of stocks. Let’s consider what is happening with this particular global crisis. Both earnings and multiples are declining. First off, the Coronovirus is halting many different types of economic activities which is driving down companies’ abilities to make product, deliver goods, provide services, etc. all around the globe. As a re