The Street: Heed These Words: Risk-Off, Flight to Safety

February 24, 2020

Article by Jim Collins in The Street

It's on. It is on. This is how Michael Jordan once described a first half performance to friend/friendly interviewer Ahmad Rashad on NBC's NBA coverage in his prime.

Today's selloff in the equity markets is real, and really necessary. The novel coronavirus, COVID-19, is now truly a pandemic, with instances seen in 28 countries outside China. Health authorities seem to have no idea how COVID-19 got to places like Veneto and Lombardy in Northern Italy from Hubei Province in Central China, and that is truly scary.

So, how should you react? You will read these phrases 1,000 times today, but please don't make the mistake of not heeding them.

Risk-off.

Flight to safety.

This is the ultimate backdrop for a risk-off market, because the risk was so high to begin with. It's a basic number, but a time-tested one, and the P/E ratio on the S&P 500, is a terrific measure of the market's risk tolerance. At over 20x 2020 consensus EPS as of last week, it was inflated to an 18-year high, and I have been shouting that from the rooftops in RM and elsewhere.

What has changed over the past four weeks has been a realistic assumption for the Earning "E". The coronavirus has hampered earnings power in a multitude of industries, and consensus forecasts for ~5% earnings growth for the S&P 500 in 2020 have been rendered fictional by COVID-19. S&P EPS were almost exactly flat at about $161 per share in 2019 versus 2018's level and that flat line is starting to look optimistic for 2020. The market is telling you not to pay that much. It's that simple.

Bonds will continue to do well here, and I see no resistance on the price of gold until we hit $2,000/oz. Those assets are NOT priced based on underlying earnings power and cash flows. That is why they are safe. That is why you should be selling portions of your holdings of stocks to buy them today.

It's on. It is on.

To read this article in The Street in its entirety, click here.

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