Markets took a big spill Monday as travel- and energy-related shares got slammed by virus fears. Concerns about the impact on China’s manufacturing industry hurt Technology stocks.
Travel and crude-related stocks take the worst hit from virus fears
Technology, especially chips, also hit hard on China production worries
Apple earnings loom large Tuesday, and could help shape rest of week
(Monday Market Close) If it moves, people sold it Monday.
Airplanes, cruise ships, roulette wheels—companies involved in all those businesses got hammered as fears of coronavirus sent stocks to their worst daily performance since October. It was the first time in nearly two months that the S&P 500 Index (SPX) fell two days in a row. The market hasn’t had an excuse to sell all year long, and Monday seemed to be peoples’ chance to start taking a little (or a lot) of profit.
Anything related to travel, tourism, and crude had a tough day, and so did the chip sector. The old fears have come back that a tech slowdown might be on the way, maybe triggered by the virus and its impact on China. Nvidia (NVDA) took a pounding. Other Technology names like Apple (AAPL) and Microsoft (MSFT) suffered, too.
The Energy space was another target. Halliburton (HAL) shares got taken to the woodshed as U.S. crude oil prices dipped under $52 a barrel at times. It seems like not long ago we were wondering if crude could take out $65. Now the question is whether it can hold $50.
With fears mounting that the virus could dent tourism, Disney (DIS) had its biggest move to the downside in a while. Shares fell more than 2% after the company closed both its Shanghai and Hong Kong theme parks. As you’d expect, airlines and casinos had a tough day, with United (UAL) stock declining nearly 5% and Wynn Resorts (WYNN) down more than 7%. Fear that people might stay away from WYNN’s Macau facility appeared to help drive shares lower.
Speaking of fear, it looks like that’s what sent many investors fleeing into so-called “safe haven” areas like bonds and gold, though no investment is truly “safe.” Gold hit a three-week high, and the 10-year Treasury yield is barely holding 1.6% just a day after falling below 1.7% for the first time since last fall.
The yield curve continued to flatten, with only about 16 basis points separating 10-year from two-year yields, down from above 20 last week, and 34 at the start of the year. That might bear watching, because a flatter yield curve can eat into Financial industry profits and even signal broader economic fears.
While you never want to overlook the unfortunate human impact of something like the coronavirus, from a market standpoint, it’s important to keep things in perspective. Selling from a position of fear is never a good idea, just as it’s usually a bad idea to buy simply because stocks are rallying.
There’s an old saying that bull markets don’t die of old age, they die of fright. Typically, though, the kind of fear that killed past bull markets wasn’t epidemic-related. An economic slowdown or rising interest rates would be more along the lines of what the person who coined that phrase was probably thinking about.
If you’re worried about the virus potentially setting off an economic slowdown with a long-term impact on stocks, research firm, CFRA had some soothing words in a report today. “U.S. equity returns were higher one, two, and three months after the first recorded U.S. incidents of SARS, MERS, Ebola, and Zika,” CFRA said.
It added, however, “Yet this sell-off is accompanied by elevated valuations and the lack of earnings surprises, since three weeks into the Q4 reporting period.”
Some sharp-eyed readers might have noticed that FactSet’s latest Q4 earnings estimate of negative 1.9% for S&P 500 stocks hasn’t really changed much over the last few weeks despite dozens of earnings reports from S&P 500 members. That could indicate that companies either aren’t exceeding pre-season expectations or are coming in too slightly above them to make much difference in the overall number.
The virus’s impact on markets shows how China’s issues boomerang around the world. As we pointed out this morning, things have changed a lot since the winter of 2002–2003, the last time there was a major viral outbreak from China. The country is a much bigger elephant in the room now with a 2018 GDP of $13.37 trillion, about two-thirds as large as U.S. GDP.
Barring another batch of virus-related news, Tuesday’s session could potentially help shift the conversation back to earnings. Pfizer (PFE), 3M (MMM), and Lockheed Martin (LMT) get things started in the morning, and then it’s AAPL in the afternoon. AAPL is such a global bellwether that its results could help shape the entire market’s tone for the rest of the week. If AAPL doesn’t beat earnings or raise guidance, the market could continue to sputter. The quality of its earnings is very important.
Advanced Micro Devices (AMD), a closely-watched chipmaker, also reports Tuesday after the close. Intel (INTC) saw its earnings cheered by the market last week, and seemed to hold in pretty well on Monday.
While it seems understandable that resort and airline stocks should hit the dirt Monday, why did investors go after Technology stocks? It could be partly out of concern over how the virus might affect China’s manufacturing sector, especially for companies like AAPL whose partners make key products there. Shanghai has extended the Lunar New Year holiday for an additional week, through Feb. 9, which raises questions about supply chain impact for AAPL. Perhaps tomorrow’s earnings call could provide more color regarding that situation.
The Fed meeting starts Tuesday, and while a rate change is highly unlikely if you go by futures prices—which suggest about an 87% chance of the central bank standing pat on the Fed funds rate.
Fed Chairman Jerome Powell might have remarks about the potential economic impact of the virus. Some analysts say it’s possible Powell could tell investors the Fed is ready to do whatever it takes to blunt the virus impact on the economy if necessary. That could mean another pledge to keep rates low.
For investors watching all this, the downturn Friday and Monday provides an interesting lesson. When there’s fundamental stuff going on, it’s important to watch the overnight action. The market opened a little lower Sunday, but didn’t really crater until the middle of the night when trading began in London. Stocks gapped lower and the SPX seemed to find some support at around 3250.
A key technical support level for the SPX is 3240, and it held up Monday. Maybe that’s a positive sign heading into tomorrow, but any additional virus news could mean another test of that mark. Volatility took off Monday as the Cboe Volatility Index (VIX)—sometimes considered the market’s main “fear” indicator—jumped above 17. It had been below 13 earlier this month.
Still, VIX didn’t really explode, and the selling seemed pretty smooth. There weren’t a lot of massive swings in volume during the day, or any huge percentage moves. That doesn’t mean investors shouldn’t be extra careful. Volatility is probably going to be elevated for a while, as it often is at times like these.
People making trades might want to consider keeping the size of those a little lower than normal and treading extra carefully. Major indices finished near their lows of the day Monday, with Nasdaq (COMP) hurting the most and the Russell 2000 (RUT) small-cap index having the “best” day of any major index.
While it’s important to keep an eye on what happens in trading tonight, investors will be handicapped a bit since three-quarters of the Asian markets are closed for Lunar New Year.
CHART OF THE DAY: GOLD—A BREAKOUT OR DOUBLE TOP? Since gold futures (/GC–candlestick) broke out of its downtrend (yellow line) price continued to move higher until the 1580 level. It almost looked like it would reverse from there but instead it hesitated and then started moving back up toward 1580. It remains to be seen if price will break above this level or if it’s going to act as a resistance level again. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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