Investors would be wise to proceed with caution and not get sucked into the proverbial dead cat bounce in stocks in the near-term, however. Because let’s face it, the unpredictable coronavirus is having a major impact on Corporate America and it could get worse in the weeks ahead. How bad can financials of companies get?
Well, the strategy team at investment bank Jefferies attempts to unpack the situation, listing several worse-case scenarios:
Companies may be forced to cut prices to clear product, which is deflationary and not favorable to profit margins (and profits).
Unsold inventory raises the potential for working capital issues. In other words, badly needed cash may be trapped in stores and warehouses.
Companies may face solvency issues if they cannot clear inventory quickly enough. That could trigger a ripple effect throughout credit markets.
Jefferies doesn’t lay out what this worse-case scenario would mean to specific stocks or the broader market. But this should be the analysis investors do right now on companies they own — Wall Street is doing the same, and could be poised to slash ratings, price targets and profit estimates in the weeks ahead. That could very well unleash a fresh wave of selling pressure in the markets.
“The bottom line is that investors should gauge companies based on their working capital position and not necessarily their earnings profile. There are deflationary and inflationary forces at work simultaneously,” reminds the Jefferies team.
Despite the fighting spirit of the market, stocks shrugged off an early bounce Tuesday morning and plunged even further by afternoon trading. The Dow fell more than 300 points as anxiety on the coronavirus moving from epidemic to pandemic weighed on sentiment. Not helping the bulls were several major financial warnings.
MasterCard slashed its full-year sales growth outlook owning to weakness in cross-border spending. United Airlines yanked its full year guidance amid a lack of visibility into travel demand. And Macy’s warned that 70 tourist-heavy stores have seen sales pressured as global travel is hurt by the coronavirus.
“The average investor should probably sit tight,” said strategist Frances Newton Stacy of Optical Capital on Yahoo Finance’s The First Trade.
Newton Stacy is on the mark.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.