Markets are in comeback mode this morning, but after Monday’s meltdown and amid continued volatility it’s unclear how long it can last. Hopes for fiscal stimulus are driving the early strength.
Stock indices make major gains overnight on hopes of economic stimulus
Volatility a little lower, but remains in historically high territory
Crude bounces back a bit on hopes of Russia/Saudi Arabia talks
(Tuesday Market Open) It looks like a little comeback attempt is brewing on hopes of government stimulus, but investors could be excused for not getting too excited yet.
Last week, two monster rallies got snuffed out the very next day. There’s no guarantee of that happening again, but this is a skittish, nervous market, so anything seems possible. Volatility is a little lower this morning as the Cboe Volatility Index (VIX) sits near 45, down from highs above 60 yesterday.
The norm is likely going to be volatility at least for the rest of the month, but give some credit to the brief market stoppage in the first minutes of trading yesterday. It did what it’s supposed to do, allowing cooler heads to prevail. Still, the numbers are likely to be huge in terms of swings at least for now, and anyone trading this market is going to have to widen out their expectations on what to expect per trade. If you’re not comfortable, you can watch and wait. You don’t have to be first to the party.
It’s great news that there might be stimulus, but you can’t get too comfortable. The market doesn’t tend to just rebound back after a day like yesterday without additional volatility. Also, American Airlines (AAL) and Delta (DAL) are cutting flights, and more coronavirus cases were reported overnight. There’s no easy solution here, and it’s not an instant thing.
The futures market went hyperbolic overnight as President Trump floated the idea of a “payroll tax cut or relief” to offset the negative impact of coronavirus. This helped partially turn things around after the worst one-day point drop ever for the Dow Jones Industrial Average ($DJI) and a 7.6% drop for the benchmark S&P 500 Index (SPX). The small-cap Russell 2000 (RUT) did even worse yesterday, dropping 9.4%.
Both the SPX and $DJI came into Tuesday down 19% from their all-time peaks of less than a month ago. An official bear market is 20%. The RUT is already down 23% from record highs it posted in mid-January.
By this morning, there were some signs of improvement outside of the quick jump in stock futures. The 10-year yield ticked up above 0.6% after skidding as low as 0.31% just 24 hours ago. Crude is still in the sick bay, but at $33 a barrel it’s up sharply from yesterday morning’s four-year low of $28. It sounds like Russia might be hinting at further talks with Saudi Arabia after the two took aim at each other in a price war over the weekend.
There’s also some good news out of China, where Apple (AAPL) says 38 of its 42 stores are back open after a long shutdown.
As for fiscal stimulus here, there’s an air of mystery around it, and some media reports raised questions about how soon it might come. The president has a media briefing on his schedule at 5:30 p.m. ET today, CNBC reported. The report from CNBC suggested not all the economic details of a potential stimulus are in place. Futures started paring back some gains after this report.
Investors’ eyes tomorrow will likely be on consumer price data due first thing. Analysts expect the February Consumer Price Index (CPI) to be flat compared with the previous month, according to Briefing.com. Core inflation, which strips out food and energy, is seen rising 0.2%.
If the data end up as expected, they’re unlikely to have much market impact. For one thing, it almost goes without saying that no one is probably worrying about the Fed raising rates anytime soon to fight inflation. The worry now might be more along the lines of potential deflation, considering the oil market’s recent behavior. Producer prices are due Thursday, and analysts expect the headline number to fall month over month.
One possible reason stocks keep struggling to find a bottom is because investors seem to be repricing the market based on expectations for slower earnings growth. No one yet really has any sense of how low or high growth might be, because no one knows the extent of the virus impact or how long it might last.
Many analysts had been expecting mid-single digits growth this year, but the coronavirus upended that, and Goldman Sachs (GS) recently forecast zero earnings growth for the S&P 500 this year. That said, not everyone has boarded the “zero” train yet. For instance, S&P Global Market Intelligence sees year-over-year earnings growth of 5.3%, down from its previous estimate of 7.9%. It does, however, see earnings falling 0.3% in Q1, and that’s similar to FactSet’s estimate for a 0.1% earnings decline in Q1.
The SPX had a forward price-to-earnings (P/E) ratio of 17.4 going into this week, according to research firm CFRA, and that’s probably fallen below 17 with Monday’s selling. Still, even a P/E of 16 would be relatively firm compared with 14 at the worst of the December 2018 sell-off, implying there might be more pain to come.
On the other hand, if the virus eases and people start looking for an improvement in earnings in Q3 and Q4, that could end up being an argument for P/E to come back a bit. It was above 19 before all this started, but that’s historically high, and might have contributed to feelings the market was overbought.
Today’s earnings included solid results from Dick’s Sporting Goods (DKS), which beat analysts’ consensus estimates on holiday-quarter earnings and revenue and trounced the Street’s same-store sales growth projections with a 5.3% number. Shares climbed 9% in pre-market trading.
In February, the first month in which coronavirus concerns really started to hit the market, it appears retail investors reduced their exposure to stocks. Turbulence in the markets, particularly toward the end of the month, might have been partly behind this.
The Investor Movement Index® (IMXSM)—TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets—decreased by 9.15%, moving to 5.16, down 0.52 from the previous period.
It looks like some investors tracked by the IMX started buying fixed income late last month and cut exposure to stocks like Amazon (AMZN), Twitter (TWTR), Netflix (NFLX), Square (SQ), and Activision (ATVI).
At the same time, the IMX showed more investors heading into well-capitalized names like AAPL, Microsoft (MSFT), and Disney (DIS). The stocks investors appeared to be gravitating toward were typically ones paying some sort of dividend and ones that have stood the test of time.
Just to reinforce something noted here yesterday afternoon, while it’s best not to get too emotional about your money, it’s understandable to feel discouraged at this point. If you’re worried about further risk, it’s not wrong to consider exiting some of your stock positions.
Having said that, it’s being “all in” or “all out” of markets that tends to really hurt people. Consider handling times like these the way the professionals do, by making smaller, more iterative moves, and not dumping stocks indiscriminately or selling everything and walking away. The idea is to try and keep calm, though admittedly it might feel like a challenge at times like these. Few are likely very happy with how their retirement balances look now vs. a month ago, and that can be a painful feeling.
However, your actions should reflect your own position as an investor. If you’re in it for the long term, say, 10 years, ultimately this stomach-churning pile-on is probably going to look like a blip on the charts, as hard as that might be to believe. There’s never been a correction or bear market that hasn’t recovered.
While no one is saying this can’t be the first time things don’t come back, the laws of probability argue against it. That’s why long-term investors might want to consider staying the course and not looking too closely at their positions every hour or every day.
Meanwhile, trading volume across the markets seems to have picked up since the virus situation began, but trading has been very orderly, for the most part. There hasn’t been a sense of panic, with the exception being some of what happened Sunday night, though it was in thin volume. Basically, volume is up, but everything is functioning as it should.
CHART OF THE DAY: DOLLAR’S FEELING SOME PAIN. As Treasury yields dropped, the U.S. dollar index ($DXY–candlestick) followed along. After hitting the top of its upward sloping channel (yellow lines), it quickly slid to the bottom channel line and broke below it. It looks like $DXY is picking up some strength today but it all might depend on where interest rates go from here. Data source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Meat in the Seats: Here’s something that seems timely. Goldman Sachs (GS) said last week it’s starting what it calls a “Coronavirus Consumer Activity Tracker” that collects higher-frequency data on spending and prices for types of consumption that would be hit the hardest by the outbreak, Bloomberg reported. The index looked pretty strong through the end of February, GS said in a research report. Weaker readings for Broadway attendance, movie-ticket sales, and available airline seat miles were offset by increases in hotel occupancy rates, retail sales, and college basketball attendance.
This suggests that Americans so far aren’t skipping mass gatherings on virus fears, GS wrote last week. The interesting thing will be checking college basketball attendance this month and Major League Baseball attendance next month, along with the more typical stuff like airline ticket and Broadway theater sales. We’ll keep an eye on the GS tracker as the weeks continue and provide updates here when possible.
Debt and Dividends: Energy companies might face a double whammy from low crude prices and the fact that many have high debt loads. Investors looking for a port in the storm might be less likely to sail toward any islands that look like they might be under water sometime soon. Many oil companies offer high dividends but don’t necessarily have the cash flow to make payments. That means digging into other parts of their businesses or taking on more debt to keep the dividends at current levels, or simply lowering or canceling dividends. Neither of those scenarios looks good from a stock price perspective.
Rates and Housing: Lower mortgage rates can come in handy for people trying to save on their monthly payments, and apparently many are taking advantage. The average 30-year mortgage dropped to an all-time low below 3.3% last week, according to Freddie Mac. Also, Quicken Loans Inc., the nation’s largest mortgage lender, said it recently had the busiest day for mortgage applications in the company’s history. However, some economists say they’re seeing more interest in refinancing vs. outright home buying, in part because people are worried about how a potential slowdown in economic activity might affect home prices.
Also, remember home supplies are tight and prices have risen every month for years. Lower mortgage rates do give people more buying power, meaning they can potentially afford a pricier house, but will they want to buy a home in this environment? Lennar Homes (LEN), one of the country’s largest homebuilders, is scheduled to report earnings next Thursday (March 19). The company’s call might give people an interesting look into the housing sector before the earnings season begins in April. Before that, investors might want to monitor the weekly mortgage applications index that comes out each Wednesday morning.
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