The market’s bounce this morning may be partly attributable to investors and traders thinking the selling may have gotten overdone.
President Trump vows support for airlines, other industries
Retail sales post unexpected drop
Southwest Airlines says it will cut its flight capacity
(Tuesday Market Open) The market is attempting a rally this morning after more heavy selling yesterday, but with volatility near record levels it’s far from certain whether gains will last throughout the day.
Equity index futures hit their limit-up stops overnight before easing back. Perhaps some of the buying is coming on hopes of government help for hard-hit industries after President Trump said in a tweet that the United States would be “powerfully supporting” industries hit by the virus, including airlines and others.
Part of the bounce may also be attributable to investors and traders thinking the selling may have gotten overdone. But it’s notable that the market has been having trouble holding on to the gains, and whether the bounce represents a true return of investor willingness to take on risk and halt the generally downward trajectory of the market remains to be seen.
Yesterday was the worst day for the Dow Jones Industrial Average ($DJI) and the S&P 500 Index (SPX) since the “Black Monday” crash of 1987. When you include yesterday’s roughly 12% to 14% losses for the four major U.S. indices, the SPX and Nasdaq (COMP) finished Monday more than 29% below their records last month; the $DJI fell to its lowest point since 2017; and the Russell 2000 (RUT) is now 39.5% off of its recent highs posted in mid-January.
In economic data this morning, February retail sales unexpectedly fell by 0.5%. They had been expected to show a 0.1% gain, according to a Briefing.com consensus estimate. While the fresh number may have reflected some of the coronavirus fallout, the market may have to wait until next month’s reading to get a full sense of the effect the coronavirus is having on domestic spending on durable goods, food, clothing, furniture, and other merchandise.
Later today, after the market closes, investors are scheduled to get another look at the retail landscape when FedEx (FDX) reports its quarterly results, which are often considered to be a proxy for economic activity. While the numbers will be backward-looking, what could be particularly interesting is if executives give an outlook for how the coronavirus crisis might affect the economy and the company.
It’s worth noting, however, that there’s much uncertainty out there regarding the virus’ potential impact. Companies from travel to consumer goods have begun withdrawing their 2020 earnings guidance. This morning, for example, Southwest Airlines (LUV) withdrew its guidance for the year and said it would be slashing its flight capacity by 20%.
Earnings season is set to kick off in a few short weeks. And though we frequently remind readers to consider tuning in to corporate conference calls to hear from company executives about the economic and competitive landscape surrounding the company, the overriding theme could be “we don’t know for sure.”
In their search for guidance, some people are looking back to 2008 for comparisons to the situation we’re facing now. But it’s worth mentioning a key difference: Back then restaurants, sporting events, and stores weren’t shutting down. People may have curtailed their spending out of economic necessity, but they at least had the choice to spend if they wanted to. This time around, it may take longer to get the economy ramped back up.
Back to FDX: Yesterday was not a good day for shares of the shipping giant, as investors sold them and those of many other stocks as worries continued to ratchet up about how the coronavirus crisis might affect the economy and corporate profits. Amid the worry, Wall Street’s main fear gauge, the Cboe Volatility Index(VIX), rose sharply and posted its loftiest close ever. (See chart below.)
Perhaps the most disturbing thing about yesterday’s selloff was that it came after anothersurprise rate cut by the Fed and the announcement of a fresh round of so-called quantitative easing where the Fed will buy up to $700 billion of Treasury and mortgage-backed securities.
One might think that the $DJI would not have its worst day since the 1987 market crash after an announcement like that, which means businesses are once again able to get very cheap credit in hopes they’ll help the economy recover after the COVID-19 crisis eases.
It seems that the ferociousness of the selling is simply an indicator of the market’s uncertainty as investors try to reprice stocks. The problem is, because of the unknowns about how long the outbreak will last and how severely it might affect the economy, investors really don’t have a solid target where, once hit, they could say, “OK, we can start taking some risk back on.”
Investors appeared particularly dismayed Monday after President Trump said the economy “may be” heading for a recession and said it may take until the summer to get the crisis under control domestically.
Last week we talked about the SPX price-to-earnings (P/E) ratioand how earnings season might help investors get a better feel of where stocks could be properly priced. One of the problems now is that with the virus impact on Q1 earnings and beyond so uncertain, no one can really say if stocks have gotten low enough to reflect this downturn in the economy.
As of Monday’s close, depending on which analyst’s 12-month forward earnings estimates you choose, the P/E for the SPX now might be approaching an interesting area. That’s the level just below 14, which was the approximate bottom for P/E at the most recent low point in December 2018.
The forward P/E now appears to be below 14 after Monday’s washout in stocks, but the problem is that the “E,” or earnings, is such a moving target. Depending on where the E ultimately lands, we could be at a P/E of around 13 now, for instance, which is usually considered pretty low for historic P/E. Or we could be at 15 or even higher if the country enters a recession and earnings estimates keep plummeting.
The 20-year average P/E is 15.5, according to research firm FactSet, but it fell to as low as 10 back in the European debt crisis of 2011. It was knocking on the door of 20 when the virus selling first hit a month ago.
If the virus crisis does last well into summer, as President Trump said it might, not only Q1 and Q2 could be affected but also Q3. The market’s swift ride down on Monday might have been partly due to that. People are repricing the “P” to match what looks like a possible lower “E.” We’ll likely know more about what the “E” could be once companies start reporting Q1 earnings next month and rolling out guidance for the following quarters.
No one can say yet how low the E has to go to reflect reality, because reality is so confused right now. It’s kind of like after the 9/11 attacks, when it was unclear how long the crisis might continue and whether the economy would get back on its feet anytime soon. People are kind of feeling around in the dark, and that partly explains why markets keep gyrating so much.
It’s possible we could look back six months from now and say stocks got “oversold,” if things come back more quickly than the worst-case scenario that’s being priced in and earnings don’t get hit so hard. It’s also possible the market might still be priced too high now to reflect the ultimate earnings picture if the crisis persists long into the year.
So the lesson here, if there is one, is to consider taking anybody talking about “low-priced” stocks and great buying opportunities with a grain of salt. No one knows if they’re actually low or not. But it also means keeping some optimism, because if things do start turning around and case numbers slow, it could mean the market did what it sometimes does in a crisis: Prices in a worst-case scenario as people scurry for protection.
CHART OF THE DAY: VIX Surges: The Cboe Volatility Index (VIX) recorded its highest ever close yesterday. Wall Street’s main fear gauge finished at a record closing high of 82.69, which beat its prior closing high from 2008. Investors were spooked on Monday amid the drumbeat of coronavirus news, including comments from President Trump that the U.S. economy “may be” headed for a recession.Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Eyes on Housing This Week: We’ve noted before that the U.S. consumer has been a bulwark of the global economy and helped the United States weather the trade war last year. Now that COVID-19 is raising questions about how well domestic retail spending could hold up as people socially distance themselves and states close restaurants and bars, it may be a good time to think about another segment of the economy that might be able to weather the storm a bit better—housing. Later this week, the market is scheduled to get data on housing starts, building permits and existing home sales for February as well as a housing market index for March.
Forward Looking: That housing index, scheduled to come later this morning, is from the National Association of Home Builders. While the index doesn’t usually have a high impact on trading, it can be useful because it not only asks respondents to rate conditions for the new homes market now but also over the next six months. The government housing data this week will be backwards looking for February, when domestic coronavirus worries didn’t really start ratcheting up until later in the month. So the NAHB report could provide a valuable gauge for what could be to come. A Briefing.com consensus is forecasting the new number to come in at 74, unchanged from February’s figure.
Housing a Shelter From the Storm? There are a few reasons to think that the housing market might be spared some of the pain that could affect retailers. First, buying and selling houses takes more time and effort than buying a pair of socks. So while people might put off the purchases of consumer goods, they might not change their plans on buying a house by that much, perhaps just delaying a meeting with their agent by a few days, if at all. We’ve also continued to see a strong jobs market, which supports home buying. It’s true that the coronavirus could change the labor market status, but with that market already really tight, there might be some cushion there. Perhaps the most compelling reason that the housing market could be resilient even if consumer spending takes a hit is that interest rates are once more ultra low. That could lead to homebuyers wanting to take advantage of lowered mortgage rates. And some who might have waited longer could decide to take the plunge earlier.
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