Shares of retailers RH (RH -4.56%) and Williams-Sonoma (WSM -2.99%) and event promoter Live Nation Entertainment (LYV -1.39%) rode an ugly stock market down sharply on Monday. All three closed down more than 10%. Today's big drop came on what was easily the worst trading day for U.S. stocks since the throes of the global financial crisis more than a dozen years ago. Both the S&P 500 and Dow Jones Industrials lost almost 8% of their value today as worries over the rapidly growing novel coronavirus outbreak accelerate.
Today's sell-off was ignited by weekend news that the coronavirus is indeed spreading rapidly around the world, with cases of COVID-19 now in more than 100 countries. As a result, more and more actions to limit the spread are being taken by governments, ranging from local quarantines to full-on border lockdowns. As a result, markets reacted today on the worst-case assumption that a global recession is more likely than ever (and may have already started).
Adding gas to the fire, oil markets are in pandemonium. Crude oil prices suffered their biggest single-day drop in 29 years on Monday, following a breakdown in negotiations between OPEC and Russia to cut oil production. In a sharp reversal from its attempts to broker a shared reduction in output to stabilize prices, Saudi Arabia spent the weekend slashing prices and promising to increase its pumping in an effort to push higher-cost oil production out of business.
As a result of these two things -- an oil market in turmoil and a global economy that's looking worse every day -- investors sold heavily out of any stock that looks at risk from either weak economic conditions or low oil prices.
Our three stocks above fall into the first category, selling discretionary goods that consumers don't have to have.
In addition to having outsize exposure to economic downturns since they don't sell staple goods, Live Nation, RH, and Williams-Sonoma are also heavily exposed to the potential downside of the underlying cause of the market's panic: increased fears of exposure to the coronavirus in public places.
All three were already down sharply this year, and are now down 34%, 32%, and 26% respectively. Moreover, there's certainly the potential they could fall even further. Hundreds of major events have already been cancelled, including SXSW, one of the biggest festivals in the world, and that has investors eyeing Live Nation in particular as likely to have a tough year. For our two retailers, investors are selling heavily on the potential for falling sales as people avoid public spaces over the threat (real or just perceived) of exposure to COVID-19.
But looking at this from a longer-term perspective, these remain three high-quality, relevant businesses. They also have a number of durable advantages that have proven valuable over the long term and made them profitable investments.
But with that said, the smart move for now is probably to put your hands firmly in your chair and sit on them. We have very little real information about the state of the economy and how these companies are actually being affected. Investors would probably do well to wait for the dust to settle, or at the very least, consider making multiple small investments over the next few weeks or months as things play out a little more.