Last Week’s Stock Market Crash Was Warranted, but it Was Also an Overreaction

Last week, markets suffered their worst week since the 2008 financial crisis. A rapid escalation in fear of the financial impact of the Coronavirus triggered a massive sell-off around the world, with potentially a lot more to come.

At this point, the main thing fuelling the fire is uncertainty — the one factor that can trigger fear faster than anything — and when there is fear in financial markets, there is no telling how bad things will get.

Many people have varying opinions on the subject, with some investors saying this is just the start of something major, and others calling this a minor correction that won’t last long.

Regardless of what happens, when volatility creeps into the market like this, it creates major opportunities, as valuations move out of whack while the true long-term value remains unchanged.

Here’s everything you need to know about the market situation.

Why it was warranted

The virus is serious and spreading faster and faster each day. The fear among medical professionals is that it can spread before it goes noticed, potentially creating an exponential number of cases.

Since it’s spreading so fast, and even the best experts admit it’s hard to tell how big it will get and how long it will last, and even thoughts of cancelling the 2020 Olympics, the Coronavirus is clearly a serious event that will affect businesses around the world.

Because of globalization, and because different countries’ economies are so integrated with each other, even if some countries manage to stay relatively virus free, it doesn’t mean businesses won’t be impacted.

It also doesn’t help with all the unknowns that still remain, and because it’s hard to predict the outcome, businesses and investors want to remain as conservative as possible to reduce anymore negative surprises.

Why it was an overreaction

Despite how serious it is and how much of an impact it will have on global economies, the market crashed way too fast last week, with major indexes like the S&P 500 or the TSX losing roughly 10% of their value in just five trading days. Clearly, volatility is becoming extreme.

10% in a single week is a severe overreaction, and even though you could make the argument that markets were due for a correction or vulnerable to a sell-off — considering the length of the bull run we were in and the fact that we were at all-time highs — 10% is still a major move.

In economics, there is a lengthy time lag for things to take effect, so although businesses and economies in Canada and around the world will eventually be impacted, it will be quite a while before we see anything meaningful in the statistics.

Opportunity

Regardless of what happened last week and what will happen going forward, when there is this much volatility, it creates major opportunities.

Companies with solid long-term operations, such as Suncor (TSX: SU)(NYSE: SU), that you can feel confident owning shares of for the next 50 years, are perfect examples of major opportunities.

When some of the top businesses in Canada lose a major portion of their value in such a short period of time, these stocks become extremely attractive.

Suncor is a massive $50 billion integrated energy company, and one of the top stocks on the TSX. The company produces oil, refines it, and sells it through its network of over 1,750 retail stores across Canada.

Financially, it’s an extremely stable company, which may be the most important thing to consider at the moment.

Its debt-to-equity ratio is just 0.4, and the company is basically cash flow positive as long as West Texas Intermediate stays above $45 — what’s essentially been the bottom of oil’s trading range since 2016.

Its stock was down roughly 8% last week and was already trading at the bottom of its 52-week trading range before that. It now has incredible value, trading at just nine times its free cash flow, with its dividend yielding upward of 5%.

Opportunities like this don’t come around often, but it’s the perfect time to buy stocks.

Regardless of what happens next, whether the selloff continues or markets start to recover, be cognizant that any decision you make is a long-term decision based on value, not a short-term decision made on impulse.