Comeback Kid: Market’s Wild Recovery Continues, Boosted by Virus Treatment Hope

Markets are getting an early boost from reports of a possible treatment for coronavirus. It’s also a huge earnings day, with reports from Disney, Merck, GM, and Ford under scrutiny.

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5 min read
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Key Takeaways

  • Recovery rally appears set to roll on as investors see reports of a possible virus treatment

  • Big batch of earnings this morning including GM, Merck

  • Disney reports strong start to streaming service, but Ford’s earnings disappoint

(Wednesday Market Open) It started as a buy-the-dip rally, but it seems to have morphed into a buy-into-strength rally, with major indices eyeing fresh all-time highs. Whatever you call it, it’s been a wild week, and we’re not even at halftime.

The latest surge came in pre-market trading Wednesday after Asian stocks climbed more than 1% on a report out of China of a possible coronavirus treatment. So far, it seems like it’s been enough to turn U.S. stocks around from earlier losses and is helping the market significantly. That said, some companies—including Nike (NKE) and Walt Disney (DIS)—are starting to talk about the virus and its possible impact on their sales in China, reinforcing the risk that’s still out there. 

Many investors appear to be throwing some (but not all) of those risk worries out with the bathwater the last two days despite predictions that the coronavirus might take a real toll on China’s long-term economic growth prospects (see more below). Tuesday’s sharp rally brought the S&P 500 Index (SPX) back toward levels it last saw before the virus in mid-January, and some analysts were telling the media about great buying opportunities at lower levels of the market after last week’s selloff.

That might be a little hasty, as a talking tree in a movie once said. At worst, the sell-off last week took the SPX down to about 3% off its all-time highs. Some market watchers had speculated about a 5% to 6% drop before buying interest would recharge, but now those predictions look way off.

Whatever the case, it’s a big earnings morning, with General Motors (GM) up 1% after the company easily beat Wall Street analysts’ estimates. This might be a call worth listening to for the company’s discussion about the situation in China, where it has a huge business.

The news from Merck (MRK) was mixed. Shares are down nearly 2% after the company came up just short of Wall Street projections on the revenue side despite beating on earnings. It did project above-consensus earnings for the full year, with revenue about where analysts had expected. 

MRK is doing a little restructure, planning to spin off its women's health, legacy brands and biosimilar products into a new company. That might be interesting to watch, especially the biosimilars part. Those drugs were developed as cheaper versions of costly biologic products used to treat auto-immune and other diseases and are part of a growing challenge for established biotech firms. 

Late Tuesday served up disappointing results from Ford (F), which missed analysts’ bottom-line projections and gave guidance that came up short. Shares were getting run over, down more than 8% in pre-market trading. DIS, however, saw shares bounce slightly ahead of the open after beating Wall Street consensus on both earnings and revenue and reporting strong Disney+ streaming paid subscriber numbers of nearly 29 million since the service launched last fall.

On the data side, weekly crude oil inventories later this morning might also get a glance from investors as crude futures gyrate near $50 a barrel level and fell below it at times Tuesday to nearly 13-month lows. Crude demand out of China could slide 20% due to coronavirus, Bloomberg reported, meaning a three-million barrel a day demand drop hitting producers. That would be the worst oil demand shock since the Sept. 11 attacks, Bloomberg said, and might help explain why crude prices kept dropping Tuesday even as the U.S. stock market took off. 

Tesla Gyrates After Huge Day

Of course, the big story Tuesday was Tesla (TSLA), up 20% at times and at one point knocking on the door of $1,000 before a turn lower at the end of the session. A classic “short squeeze” might be developing, with investors who went “short” in TSLA shares hoping to benefit from a slide in prices now trying to exit all at once amid a series of positive developments for the company. These include consecutive profitable quarters, the opening of its plant in China, and strong sales and deliveries.

However, as we noted yesterday, getting involved here is like entering the ring with a top prizefighter and hoping to land even one good punch. At this point, TSLA is probably only a stock for the professional to consider trading. Watch out, as a young futures trader was once taught, for “chocolate-covered hand grenades.” The stock might feel great when it’s rising $80 in an hour, but it can fall just as fast, as we saw in the closing minutes yesterday.

Shares fell just a bit in pre-market trading, but don’t rule out another wild ride today, the way things have been going. If TSLA sputters today, it could suck some of the euphoria out of the market.

The meteoric rise of TSLA seemed to help some related stocks yesterday in the battery business. Lithium product producer Albemarle (ALB) shot up almost 12%. The huge upward swing by TSLA has some analysts talking about what they say might be the beginning of a “secular trend” favoring electric and autonomous car makers and the companies that help provide products for those cars. We shall see.

Taking a 180-degree turn, a little pity might be in order here for investors in Alphabet (GOOGL). The company had bad timing with its disappointing earnings report late Monday and was one of the only major stocks with big losses Tuesday, falling more than 2%. On any other day, as they say. 

Some Still Play Defense

With DIS getting set to report after the close Tuesday, it looked like investors wanted to have their princess cake and eat it too.

Meaning they bid up stocks for the second day in a row, but also didn’t entirely give up playing defense. The 10-year Treasury yield touched 1.6% during the day but its upward move hasn’t been able to match the major stock indices Monday and Tuesday. Volatility dipped a little but the Cboe Volatility Index (VIX) stayed near 16 as of late Tuesday before settling down a little Wednesday morning to just below 16. That’s down from highs near 20 late last week but still well above recent pre-virus lows of near 12.

Gold was the one defensive metric that took a major step back Tuesday, falling all the way below $1,560 an ounce. From a technical standpoint, gold’s failure last week to move solidly above $1,600 probably looks a bit bearish on the charts. Gold is down again this morning.

CHART OF THE DAY: FLIPPING THE RISK SWITCH. As the risk-meter toggled from the "off" position to "on," traders unwound some defensive positions. Gold futures (/GC— candlestick) bounced off the $1600 level (blue line) and quickly retreated to the mid $1500s. Meanwhile, the Cboe Volatility Index (VIX—purple line) spent only one day above 18 before drifting down to the mid-teens. Data sources: CME Group, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Beyond Coronavirus, China Slowdown Worries Fester: Even before the virus hit, China’s economic growth had slowed to 6.1% in 2019 from 6.8% in 2018. Now some analysts think Q1 growth there could fall below 5%, which would be around a three-decade low for the Asian economic giant. Analysts surveyed by FactSet say China’s economic growth will slow to 5.9% this year and 5.7% in 2021, the research firm said late last week. The 2020 number may be revised lower if the economic disruption persists. “A significant hit to GDP growth in the world’s second largest economy would reverberate across the global economy; this has been the fear hitting global equity markets in recent days,” FactSet noted in a report. A decade ago, China’s economy was growing between 7% and 10% a year, and that might have helped fuel a lot of the strength in U.S. stocks between then and now. How U.S. companies with exposure to China would do in a 5% China GDP environment is up for question.

Coffee Break: Overheard at a coffee shop after Friday’s selloff, “Don’t worry too much about (the market). Just ignore things and look at your portfolio again in a month and it’ll probably be back where it was.” That’s a paraphrase, but probably not too different from what many investors heard following the latest market hiccup. While it’s sometimes a good idea to not glance at your portfolio for a few days so you don’t sell out of fear amid geopolitical panic, you don’t want to be complacent, either. A lot of investors probably feel like the guy in the coffee shop, considering how quickly the market’s bounced back from so many downturns over the last few years. Brexit, trade wars, Iran, North Korea, rising bond yields—whatever gets thrown at the market, things  seemed to recover and go even higher. 

While you could see it that way and think coronavirus is no different, remember that nothing is forever. The market can’t keep rising without a break (even though it’s already coming back toward where it was before the virus), and recessions are still part of the economic cycle. The Fed has done an impressive job supporting the stock rally, but that’s not really its role. If Fed officials see inflation, they’re liable to do something about it that’s not necessarily in the market’s interest. All that is a long way of saying, don’t panic, but don’t put your feet up completely, either. Keep an eye on data and earnings, because those are what really drive things in the long run, whatever happens in geopolitics.

All or Nothing? No Way: How can you still participate in this long bull market without necessarily risking everything you have? By going in partially, not all the way. It’s one of the things we often stress here, but it’s worth saying again. One of the big mistakes people tend to make is thinking investing is an “all or nothing” game. On the other hand, most professionals think of it as a “partial” game. That means if you had a good 2019, you might consider taking a small percentage off the table and realizing a profit. Removing a bit of risk could give you some comfort and help you think straight.

Good Trading,

JJ

@TDAJJKinahan

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

  • Recovery rally appears set to roll on as investors see reports of a possible virus treatment

  • Big batch of earnings this morning including GM, Merck

  • Disney reports strong start to streaming service, but Ford’s earnings disappoint

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