The panic in the stock market is palpable now. Canada’s TSX Index is currently trading at the same level as it was on December 31, 2009! That’s a grim fact I can’t even wrap my head around.
However, I refuse to see this as a catastrophe and am absolutely convinced this is an opportunity. Yes, I believe the market is oversold and that we could be nearer to the end of this crash than most investors realize. Here’s why.
TSX Index valuation
Perhaps the most hopeful sign that the market crash is nearing its end is that the TSX Index is starting to look undervalued. The index is currently trading at a price-to-earnings ratio of 11.7 — one of the lowest in its history.
Now, it can be argued that this P/E ratio is based on last year’s earnings, and since we’re expecting a recession in 2020, corporate earnings will be lower this year. That’s fair. Let’s adjust that ratio for a 30% drop in earnings. Now the forward P/E ratio is 15.2.
A 15.2 P/E ratio implies an earnings yield of 6.57% for the TSX Index. That’s much better than the rental yield on properties, the interest on savings accounts and the yield on government treasuries. In other words, it’s attractive for investors.
Another valuation metric is the total market capitalization-to-gross domestic product (GDP) ratio, also known as the Buffett Indicator. In Canada, this ratio is 92% at the moment, which means the index is undervalued and could stop bleeding soon.
Government support
Another potential reason for hope is the fact that the federal government has announced economic relief packages. Student debt repayment is deferred, small businesses and freelancers have access to tax credits, and COVID-19 patients who lose their job will get weekly support to pay their bills.
The Trudeau administration’s $82 billion economic package puts a floor on Canada’s economy and its stock market. The TSX Index selloff could be over soon.
Signs of normalcy in Asia
On March 18, China’s Wuhan reported no new infections of coronavirus for first time since this outbreak began. The rest of China has also managed to “flatten the curve” and control the number of active cases. Singapore, South Korea, and Japan have similarly done an excellent job.
This is, perhaps, the most hopeful sign yet. While the rate of infections is rapidly accelerating in Europe and North America, there is hope that the current shutdown and travel restrictions will eventually help us flatten the curve, too. In that case, social life and the economy should start normalizing within a month.
That could be another reason to believe that the TSX Index will at least stop losing value in the near term, even though a full recovery could take much longer.
Bottom line
The valuation of the TSX index, along with the government’s support and signs of normalization in Asia make me believe the end of the current crash is near. This could be an excellent time for long-term investors to add some bargains to their portfolio.
