Rally Crusher: Stimulus Postponement Snuffs Out Market Exuberance, Raises Fear Levels

Stock markets saw accelerated selling after President Trump said he would halt stimulus talks. This reversed today’s earlier rally with most of the S&P 500 sectors taking a hit, especially airlines, which got hit the hardest.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/White House: Flat ahead of debate
5 min read
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Key Takeaways

  • Trump’s announcement ending fiscal stimulus talks reverses early rally

  • Worries grow about airlines now that stimulus appears out of question for moment

  • Focus could start turning to Fed as monetary policy now being eyed

(Tuesday Market Close) Remember this morning when we warned that the market could be “headline sensitive?”

Well, proof came an hour before the close when major indices hit the skids on one specific headline: President Trump is ending stimulus negotiations until after the election.

Until about 3 p.m. ET, things seemed to be going pretty well on Wall Street as fiscal stimulus hopes—which helped drive yesterday’s rally—provided a nice tailwind and stocks posted three-week highs. The market rose last week after four consecutive weeks of declines, and it felt like things were finally coming together after a rough September.

That short era of good feelings was based mainly on hopes that Congress and the president could find a way to compromise before the election. Now it looks unlikely, to say the least, and maybe impossible in the short-term. So you could argue that we’ve lost one of the bedrocks of the recent rally and now stare at four more weeks of campaign jawboning with the average person getting no additional help from Washington.

Airlines Take the Spotlight as Furlough Worries Go Wheels Up

It goes beyond “people,” too. One of the things a stimulus was supposed to do was prop up the airlines, which threatened massive furloughs with the old stimulus over and done. The speaker of the house told airlines last week to hold the phone on any furloughs because they might get stimulus help. Now, without more generosity from the government, it seems likely those employees will be out of a job, whether temporarily or permanently.

This comes after a big layoff announcement last week from Walt Disney (DIS). The jobs picture seems to be trending the wrong way, and this is after last week’s disappointing September payrolls report.

Shares of just about every major airline plunged more steeply than the broader market this afternoon following the White House announcement, and remember, several airlines are due to report in the next two weeks. Some of the biggies coming up include Delta (DAL), United Airlines (UAL) and American Airlines (AAL). This isn’t necessarily the best way to start the earnings season.

Airlines and travel weren’t the only suffering sectors. Ten out of 11 S&P 500 sectors tumbled on the news, with Communication Services and Consumer Discretionary among the hardest hit as investors apparently became worried about the depth of consumers’ pockets as the pandemic goes on with no fresh funds coming in the mail. Only Utilities, a sector sometimes seen as a “safe haven” due to high yields, managed to gain ground.

Another key metric coming off its highs was the 10-year Treasury yield, which dipped to 0.74% after challenging 0.8% earlier in the session. Yields tend to rise amid economic optimism and vice versa. Until this afternoon, yields were flirting with their highest levels since June, again mostly predicated on a stimulus.

Ironically, or maybe not, the president’s announcement came only hours after Fed Chairman Jerome Powell dramatically outlined risks to the economy in the event of no action from Congress. “The expansion is still far from complete,” Mr. Powell said in a speech at a virtual economics conference Tuesday, The Wall Street Journal reported. “At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship.”

Thoughts now might turn toward the possibility of additional Fed stimulus, but there’s only so much more Powell and company can do. If they lowered rates further, that would take the nominal interest rate into negative territory, something no one at the Fed has shown much appetite for doing. They could print more money and use it to buy corporate bonds, or perhaps even stocks, but that kind of stimulus doesn’t always have the same immediate impact as sending checks to actual people or by having Congress send checks to corporations and small businesses.

From a technical perspective, today’s moderate drop in the S&P 500 Index (SPX) sent it back below the 50-day moving average, that level we’ve been talking about as key support this week near 3365. However, it’s not very far below it, and volatility shot higher, but still didn’t push the Cboe Volatility Index (VIX) above 30. That could be an important factor to watch tomorrow. Any move above 30 in VIX would likely signal more negativity around stocks.

Most oddly of all, maybe, small-cap stocks in the Russell 2000 Index (RUT) barely fell at all Tuesday. This is weird because small-caps had been rallying hardest on hopes for a stimulus that might help smaller businesses with more of their footprint here in the U.S. rather than overseas.

Going into tomorrow, the question becomes whether stocks can regroup and once again push above that 50-day moving average. Also the VIX watch will be on and fears could grow if that 30-mark gets taken out.

So What Does This All Mean?

While it might be a stretch to remain “optimistic” after the president’s announcement and Powell’s warning, it’s fair to say that, in and of itself, the postponement of stimulus isn’t a reason to be more pessimistic versus this morning. Consider:

On Sept 24, the SPX, after bottoming out just above the 100-day moving average (which today sits at 3239), rallied 4%, and today gave back only 1.4%. While there’s still a bit of a climb if the SPX were to take out the all-time high just under 3600, the market didn’t exactly shift to panic mode.

Crude oil has been on a nice run this week, rallying 6% yesterday alone, and today WTI crude rose above $40—and stayed there even after the news from the president (see chart below). Granted some of the rally has to do with the supply side—an oil strike in Norway and another hurricane threatening supplies in the Gulf of Mexico. However, if the stimulus news were a true demand shock, crude oil would likely have flipped back south of the $40 mark. That being said, the Energy sector did move from sector leader to laggard this afternoon.

One point to remember: Markets trade on fundamentals, and expectations of future changes to those fundamentals. That means corporate earnings, employment and consumer spending trends, the macroeconomic environment here and abroad, and sometimes, politics. Sure; in the short term, markets can be driven by momentum. And in the short term, with stimulus hopes dashed (for now anyway), this could mark a change in the momentum.

And if stimulus today would have helped some companies and individuals bridge the gap between now and the post-COVID future, this is a setback. But investors with a long-term focus should look beyond today’s headlines toward the markets of tomorrow.   

CHART OF THE DAY: CRUDE’S STILL RUNNING. After a few up days, crude oil futures (/CL – candlestick) are still holding on above $40 per barrel (yellow line). It’s also fighting against resistance of its 50-day moving average (blue line). Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Good Trading,JJ@TDAJJKinahan

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Key Takeaways

  • Trump’s announcement ending fiscal stimulus talks reverses early rally

  • Worries grow about airlines now that stimulus appears out of question for moment

  • Focus could start turning to Fed as monetary policy now being eyed

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