With the outbreak continuing to spread worldwide, the market is continuing its downward spiral this morning.
Marriott has been re-opening hotels in China
Personal income rose 0.6% last month, ahead of expectations
(Friday Market Open) What the market has been doing this week is repricing where it thinks earnings should be in light of the hit to global economic growth that is expected from the coronavirus.
With the outbreak continuing to spread worldwide, the market is continuing its downward spiral this morning. The shunning of risk has also led to a selloff in oil and a fresh-all time low in the 10-year Treasury yield below 1.2%.
With stocks taking such a beating this week, there may actually be a bit of a bump later today as some investors might want to buy the dip. But since market participants may not want to take as much risk into the weekend, we might see more selling into the close.
One lesson investors might take from this week’s action: Take small bites. As much as we’d like to remove emotion from the equation when it comes to investing and trading decisions, emotion is of human nature. But taking an all-or-none approach has—historically anyway—been generally a suboptimal approach. On the way up, no one knew where the top would be—or whether we’ll return to those levels in the near future. Similarly, no one knows where we’ll find a bottom in this down leg. If you’re considering moves—in or out of the market—consider taking bite-sized pieces.
From a nominal standpoint, this has been a rough week. But from a longer-term perspective, and when considering where we’ve been, this might be just a blip on the radar screen.
While this week’s activity is about future uncertainty, the economic data is still flowing, and much of it is still pretty robust. This morning, data showed personal income rose 0.6% last month, well above a Briefing.com consensus of 0.4%. Personal spending showed a 0.2% gain, just short of an expected rise of 0.3%. Granted, these numbers are backward-looking and don’t reflect current uncertainty, they’re still a reminder that we’re entering this period of uncertainty on what looks like solid footing.
A little later this morning, the University of Michigan is scheduled to release its Consumer Sentiment index. Last time out, Michigan Sentiment came in at 100.9, just shy of the expansion high of 101.4. Might the U.S. consumer continue to carry the economic torch? See more below.
Yesterday, the pain for the bulls continued. The indices fell for the sixth day in a row and were well into “correction” territory, down double-digits from recent highs.
If you look around the rubble left after the major indices gave up an early comeback attempt and closed well below their 200-day moving averages and other key support levels, there were a few green shoots poking through. As the meltdown took hold, they might have become difficult to see, but here’s a sample.
News that Starbucks (SBUX) was re-opening many of its stores in China appeared to provide a caffeine injection earlier in the day. Meanwhile, Best Buy (BBY) had nice earnings, but the stock couldn’t capitalize. Marriott (MAR) powered back after delivering on earnings. The company has been re-opening hotels in China recently. The fact that MAR has re-opened hotels adds to the idea that some things are turning around in China. It’s far from over, but encouraging to watch.
If major hospitality names start to recover a bit, the next areas to consider watching are airlines and rental car companies. However, two airlines got downgraded Thursday by analysts. There’s also some optimism that the virus might lose a little of its vitality in warm weather, so that can’t come soon enough.
Another key stock to watch is Apple (AAPL), because it’s such a bellwether—for the state of the U.S. consumer economy as well as the global supply chain. Is AAPL priced fairly for what may be a coming hit to earnings, or does it need to come down more (or did yesterday's selloff overshoot the mark)? People traded AAPL in response to tariffs and now in response to the virus. AAPL got hammered Thursday, falling more than 6%.
It can be dangerous to try to pick a bottom, bringing to mind that old Wall Street warning about “catching a falling knife.” The question on many minds is whether a bear market 20% drop could be in the cards. It’s hard to say, because at this point, there’s no real way to know just how big an impact the virus might have on earnings.
Goldman Sachs (GS) predicted no earnings growth not just for Q1, but for the entire year. The market initially got slammed by the GS report, but looking back, it might have been one of those “always darkest right before dawn” moments for some participants. Whether GS is smart to be so bearish and whether optimistic investors jumped the gun by seeing things turning around both remain to be seen.
Though it’s not everyone’s favorite sport, keeping an eye on support and resistance levels, especially from a longer-term perspective such as five, 10, or 15 years, can give you some sense of the score as you watch the market every day. In Thursday’s case, the SPX and the Dow Jones Industrial Average ($DJI) both started the day near or below their 200-day moving averages and down roughly 10% from the recent highs made just over a week ago.
This quick move below those key levels of around 26,700 for the $DJI and 3050 for the SPX appeared to help push the pause button and arrest the wild selling out of the gate. Those levels didn’t hold up as we headed to the close. But on a weekly chart, that goes back at least five years, the 200-week moving average support level is at around 23,550 for the $DJI and 2632 for SPX. So longer-term, the trend still appears to be bullish.
While this week’s headlines have centered on those big red numbers in the stock market—multiple 1,000-point breaks in the $DJI for example—another big story this week is the sheer magnitude of the change in interest rates and the rate outlook. Three weeks ago the yield on the 10-year Treasury was over 1.6%. This morning, that rate ticked below 1.2% to a new all-time low. That’s a move of over 40 basis points within a month, to a 10-year rate that was already quite low by historical standards.
But it’s not just the back end of the yield curve that’s seen a massive shift—the rate outlook on the front end has been pretty dramatic as well. A week ago, the futures market had priced in about a 90% chance that the Fed would hold the line on the Fed funds rate target at its March 18 meeting. As of this morning, there’s essentially zero chance of that, with the market split between a 25 basis point cut (64% chance) and a 50 basis point cut (36% chance). And the futures market is pricing in even more by the end of the year. Though the rate-expectation distribution is pretty wide, much of it falls in the 0.5%-1.0% range. That’s compared to today’s Fed funds target rate of 1.5%-1.75%.
What’s unclear at this point is how much one or more cuts would help, other than symbolically. While cuts to the front end would certainly help flatten the yield curve, right now the virus scare is about uncertainty, and until the uncertainty is removed, companies and consumers may be reluctant to open the pocketbook regardless of any rate cuts.
That being said, if there’s any positive news on the virus front, bonds might quickly pull back along with the rate cut outlook. Stocks, on the other hand, might have a tougher slog even if the news flow improves because we know Q1 earnings are being affected and Q2 earnings are also coming into question.
CHART OF THE DAY: VIX ELEVATED: As you might expect with a shocker of a week like this, Wall Street’s main fear gauge, the CBOE Volatility Index (VIX) is substantially higher. Yesterday, the VIX almost hit 40, a level we haven’t seen since early 2018. The VIX has since moved as high as 47 overnight, but it’s still below the high we saw in February 2018. At least by this one measure, Wall Street looked to be more worried back then about the threat of inflation and Fed policy tightening than it is now about the coronavirus. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
A Consumer Question Mark: The U.S. consumer was a major domestic economic underpinning that helped the U.S. economy weather the trade war before an interim deal got signed in January. It wasn’t long before the coronavirus reared its head. And for U.S. consumers, the outbreak may pose more of a question mark. While tariffs were quantifiable to some degree, it remains to be seen whether COVID-19—the disease caused by the coronavirus—will materially affect the United States. Although some commentary from the CDC has been alarming, that has been walked back. So the question remains whether an outbreak happens in the U.S. and, if so, how severe it would be. For example, would there be widespread travel restrictions and business shutdowns like we’ve seen in China?
How Bad Could It Get Here? If people began to stay home en masse, either out of self-imposed quarantines or because of government requirement, then that would likely be bad for sales at movie theaters, retail stores, and restaurants. Airlines, casinos, and hotels would also likely take a hit. But these are huge “what ifs” based on a scenario that hasn’t happened. And even though we’re seeing an alarming number of cases outside China—including in Italy which is just a medium-length plane ride across the pond—a CDC official on Thursday that the risk to the American public is low. And in China, the hardest hit by the epidemic, hotels are starting to re-open and employees are coming back to work. That’s not to say everything is normal, and shuttered retail stores in China have certainly resulted in retailers losing sales. But it’s still an open question whether that happens in the U.S.
Still Ready to Spend: Right now, it seems possible that the U.S. consumer could continue to be a bright spot in the global economy. While global GDP is likely to take a hit because of COVID-19’s impact—not only on sales but on supply chains—the U.S. may be insulated to some degree because of continued consumer spending, as long as the virus’s spread is kept in check here. While it’s true that there could be problems keeping shelves stocked temporarily, that could just lead to pent up demand that would eventually lead to a snapback in sales down the road. After all, the American public has seemed ready to spend for some time now because of a strong jobs market and low interest rates. Plus, the domestic housing market might still remain resilient, especially given today's lower interest rate environment.
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