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Market Update

Coronavirus Surges, Stocks Sink

A surge in new coronavirus cases has sent stocks on a downward spiral.

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Surging new cases of coronavirus, both domestically and globally, led to a sharp sell-off across the U.S. stock markets on Monday. Overall, the Morningstar U.S. Market Index dropped 1.86%, with small- and mid-cap stocks declining 2.06% and 2.14%, respectively.

New daily infections of more than 80,000 cases last Friday and Saturday in the United States surpassed the prior peak in July. Investors are concerned that the surge in new cases will weigh on the nascent recovery in the consumer services sectors, especially heading into the holiday season. Industries such as airlines, cruise lines, and dine-in restaurants were hit especially hard Monday. In conjunction with the pullback in expectations for travel, oil prices fell 3.24%, leading to a pullback across the oil sector.

Yet we continue to see value across the areas that were struck hardest today. For example, in the airline industry, we give Delta Air Lines (DAL) a 4-star rating as it trades at only 79% of its fair value. Among the cruise lines, we rate Norwegian Cruise Lines (NCLH) 4-stars at it trades at 73% of its fair value. At a price/fair value of 0.55, we think the energy sector is by far the most undervalued within the equity markets today. Among global oil companies, ExxonMobil (XOM) trades at less than half of its fair value; in the oil services industry, Schlumberger (SLB) trades at about a third of its fair value. Across regional oil companies, Pioneer Natural Resources (PXD) trades at 54% of our estimate; within master limited partnerships, Enterprise Product Partners (EPD) trades at 70% of its fair value.

In addition to the rise in new coronavirus cases, the impending U.S. election continues to weigh on investor sentiment. Although national polls continue to show a high probability of a Biden win, some recent polls in battleground states show Trump closing the lead. Although we don’t think the outcome of the election will significantly alter our economic outlook or broad market valuation, we recognize that the differences in policies and regulations will have different impacts across sectors and individual company outlooks.

With the election only a week away, the probability for an additional stimulus package being agreed upon has dwindled; however, we were not expecting an agreement to conclude before the election anyway. The delay in fiscal stimulus does not change our view of market valuation or the sustainability of the economic recovery. In our view, the stimulus package will help to accelerate the pace of the economic recovery but will not change our long-term view on economic growth.

At the end of last week, the Morningstar Market Fair Value ratio was 1.05, indicating that we thought the market was slightly overvalued. This ratio calculates the price/fair value for the median stock under coverage. Even after this pullback, based on our bottom-up valuation analysis, our intrinsic-weighted valuation indicates that the broad market is overvalued by approximately 2%. However, much of the overvaluation is concentrated in a handful of mega-cap (market cap greater than $250 billion) stocks. We continue to find value for long-term investors in the small- and mid-cap sectors, especially among value stocks.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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