Hitting the Brakes? Historic Plunge Seems To Meet Buying Interest as Futures Surge

The market made a quick turnaround in overnight after hitting a low near the December 2018 bottom. That doesn’t mean things can’t fall, but perhaps investors are looking for equilibirum after yesterday’s historic plunge.

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5 min read
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Key Takeaways

  • Quick turnaround from steep losses overnight as some bargain hunters seem to emerge

  • Eyes on Washington today as investors await stimulus measure from Congress

  • Apple gets an upgrade, and consumer sentiment data awaited

(Friday Market Open) Now that we’re in a bear market, people seem to feel a little more bullish this morning.

Futures turned around sharply overnight and went “limit-up” as it looks like bargain hunters might finally be emerging. That doesn’t mean the market can’t go back down, but an upgrade to Apple (AAPL) from Wells Fargo (WFC) and hopes for Congress to pass fiscal measures seemed to help in the early going. 

This follows the market’s historic drop on Thursday. Looking back, the dramatic selloff probably indicated that investors believe the government’s fiscal plans and the Fed’s ramped-up funding actions won’t be enough to offset the economic impact of the virus. The S&P 500 Index (SPX) ended below 2500 yesterday for the first time in more than a year, down about 27% from last month’s all-time peak.

Today’s quick move up in the futures market (see chart below) raises the question of whether the market is finally finding its footing after repeated selloffs. Remember, every rally attempt since late February has met huge waves of selling pressure.

At some point we’re likely going to find an equilibrium, though volatility will probably continue. There’s potentially going to be a “wait-and-see” moment where investors start thinking about those important earnings reports ahead. That’s when we’ll start to get a picture of how deeply the virus has affected the economy. Banks kick off earnings season in four weeks.

Investors could have their eyes on Washington today to see what might come out of the House as far as some sort of stimulus. There’s also the University of Michigan’s March sentiment report soon after the open (see more below). 

Glancing Ahead

Looking at next week, retail sales and housing data loom large (see more below), but a Fed meeting is likely to top the headlines.

As of early Friday, the futures market put chances of a 100-basis point rate cut at around 76%, with chances of a 75-basis point cut at 24%. The only question besides how deep the cut might be is whether the Fed will wait until Wednesday to put it through or act earlier in the week. A 100-basis point cut would take rates all the way back to basically zero.

Already, the Fed cut rates by 50 basis points earlier this month and then on Thursday announced it will inject $1.5 trillion into the banking system. It will buy $60 billion worth of Treasury bonds over the next month. That liquidity injection might have long-term benefits, but didn’t help stocks much yesterday.

Next week also includes a couple of pretty important earnings reports from FedEx (FDX) and Lennar (LEN).

The report from FDX could be worth keeping an eye on to hear what executives have to say about consumer demand in this economic crisis, and because they might have insight into the online retail market since they deliver so many of those packages with the flowing arrow that end up on peoples’ doorsteps.

LEN is a big homebuilder that can potentially let investors know if people are flocking to buy homes thanks to record low mortgages or pulling back amid the uncertainty. Guidance from both these reporting companies is also going to probably get a closer glance than usual as investors try to get an early sense of how much companies might pare their expectations.

So What’s Next With Earnings?

Analysts are doing just that: Paring their earnings expectations.

Earlier this week, S&P Capital IQ once again lowered its 2020 earnings estimate, this time to 4.1% from last week’s 5.3%. It sees Q1 earnings falling 1.3%, compared with its negative 0.3% prediction a week earlier. As we noted yesterday afternoon, earnings drive the markets, and the question is when people will coalesce around some estimates that seem to fit the current state of the economy. 

At that point—when and if we get there—price discovery could get easier, but it might not be until next month. That’s because earnings season gets really hopping in mid-April and companies will begin to deliver their updated guidance. Hopefully by then things will be clearer about the impact and timeframe of the virus.

Price-to-Earnings: Dissecting the P and the E

The SPX price-to-earnings (P/E) ratio stood at around 16.1 as of the close of trading Wednesday, research firm CFRA reported. That’s down from a peak of 19.6 earlier this year and below the 20-year average. It’s still above the 14 mark reached in December 2018, but because earnings estimates keep sliding, no one knows if the P is properly matched to the E in the ratio. This explains in part why the market continues gyrating.

Though a 16.1 P/E ratio (it’s likely below 16 by now) might sound more attractive to buyers than a P/E of more than 19, it’s actually not so simple. No one really knows how much farther down the E might have to go, which means the P could still be mismatched and possibly at a level some would consider too high. That could help explain why you don’t see lots of people jumping in now to buy the dip. They’re probably waiting for more clarity around the E.

Recession Fears Grow as Companies Take Action Against Virus

Companies are working hard to do the right thing and protect their employees and customers from the virus. That’s a sign of them being good corporate citizens. However, worries of a recession continue to grow, and in one way, these fears reflect some of what companies are doing in response to the situation.

For instance, sports leagues are suspending their seasons, which of course is disappointing for fans. However, the economic consequences could ricochet around the country. Think of the people selling hot dogs or working in the luxury suites. Those are the people doing the day-to-day work, and their spending is likely to get shut down pretty quickly. They also, unfortunately, tend to have less to lean on than many others.

The same goes for companies sending people home to work or canceling meetings that require travel. Those employees won’t be dining out in  restaurants for lunch or buying gas for the commute. They won’t be staying at hotels or relaxing at a casino after a day at a convention (things look rough for Las Vegas). All of this could really hurt workers at gas stations, hotels, and the hospitality industry. Airlines and casino stocks have really been beaten down. It wouldn’t be too surprising to start seeing repercussions of all this in the economic data as soon as the next employment report in early April.

Recessions are a normal part of the business cycle, but some economists think this one, if it happens, could come in a pretty speedy way because of how quickly this crisis gained steam. The question is when and whether Congress and the White House might offer some stimulus, and how the market might react to what those plans look like.

CHART OF THE DAY: REVERSE FORTUNE? Overnight action in e-mini S&P 500 futures (/ES-candelestick) shows a sharp turnaround after they hit 2380. That was a low very close to the bottom of near 2350 touched by the S&P 500 Index (SPX) in December 2018. Crude oil futures (/CL-purple line) also began tracking higher last night at around the same time. Data Source: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Sentiment Check: By the time you read this, you might already know the results of what’s arguably today’s most crucial piece of data: University of Michigan Consumer Sentiment for March. This report often flies below the radar in normal times, but could have more of a market impact now because it measures how consumers were feeling and what they were worried about economically during the first part of March as virus fears grew. One thing to consider is whether the headline number might ease from February’s solid 101.0, which was pretty close to the long-term highs hit about two years ago. In the February report, the coronavirus issue “still hadn’t really permeated the consumer's mindset, although mentions of the virus were picking up as the month was drawing to a close and reporting on the issue was increasing,” Briefing.com noted. Consider watching the number and comments from the report’s chief economist this morning at 10 a.m. ET for any new observations.

Retail Sales Highlight Data Next Week: The other report that’s going to be front and center is next Tuesday’s February retail sales. Though the report is backward looking, it does cover some of the weeks in February where consumer fears were ramping up. Obviously, we know brick-and-mortar stores have had a lot of issues, though some could have gotten a boost from people stocking up on supplies. Another thing to watch is online sales. At times like these, you’d expect those to get a real lift. If people start to be afraid of getting deliveries, that would potentially be a really sticky situation. Retail sales rose 0.3% in January, which disappointed many investors at the time. In fact, you could argue retail sales haven’t really had a great month since last summer, which doesn’t necessarily bode well considering all the new pressure on consumers now.

Caffeine Jolt: If you’re like many people who stop for a morning cup at the country’s largest coffee chain, you may well be wondering how Starbucks (SBUX) is handling the possible impact of coronavirus. After all, some countries have been closing “non-essential” stores to prevent transmission, though many people would argue that hot coffee is far from a “non-essential” item. Late Wednesday, SBUX CEO Kevin Johnson sent an online note to customers, employees and the community saying that while the stores maintain regular operations across the U.S. and Canada for now, the company is prepared to “modify” things if necessary. The community-by-community, store-by-store changes could include limiting seating to “improve social distancing,” as Johnson puts it, enabling mobile order-only scenarios for pick-up or delivery through Uber (UBER), or limiting some stores to only drive-through.

“As a last resort, we will close a store if we feel it is in the best interest of our customers and partners, or if we are directed to by government authorities” Johnson wrote, saying he expects any such closures to be temporary. He added that there are “encouraging signs of recovery” in China and that more than 90% of SBUX stores there have reopened. Hopefully this helps soothe any coffee deprivation fears you might be having, though there’s always the old-fashioned solution of brewing a cup at home. Time to dust off the old percolator?

Good Trading,



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This week's economic calendar. Source: Briefing.com

Key Takeaways

  • Quick turnaround from steep losses overnight as some bargain hunters seem to emerge

  • Eyes on Washington today as investors await stimulus measure from Congress

  • Apple gets an upgrade, and consumer sentiment data awaited

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