Coronavirus fears continue to spook stock markets, with the broader equity indices accelerating losses heading into the close. Treasury yields also dropped to their lowest levels.
Worst day of worst week since 2008 financial crisis as slide picks up steam into close
Oversold conditions could mean some buyers coming back on Friday, but no guarantee
Consumer sentiment, inflation data due early tomorrow, but focus still on virus spread
(Thursday Market Close) The gloomy way things ended today could potentially set up a more constructive situation heading into Friday.
That’s not guaranteed, of course, especially the way stocks closed at their lows and continued heading lower after the bell rang in a wave of selling that blew things apart in the last hour. However, Thursday’s 4% losses—the steepest decline in the toughest week for stocks since the financial crisis of 2008—might have gotten things to a point where stocks are looking a bit oversold. In fact, there was an overwhelming imbalance of sell orders going into the close and obviously there’s not a lot of green on the board.
The indices have fallen six days in a row and are now well into “correction” territory, down double-digits from recent highs. A good chunk of the S&P 500 (SPX) is now in bear territory, down 20% or more.
The problem is that all week, anyone who’s taken a nibble has ended up getting slammed. A very firm rally from the morning lows lost steam today and the market ended up in even worse shape by the end of the session. Muscle memory of things like that could potentially limit buying interest. Still, you could argue that things have gotten a bit out of hand.
If you look around the rubble left after the major indices gave up an early comeback attempt and closed well below their 200-day moving averages and other key support levels, there were a few green shoots poking through. For instance, news that Starbucks (SBUX) was re-opening many of its stores in China appeared to provide a caffeine injection earlier in the day.
Also on the bright side, a couple of stocks seemed to get over some of the weakness today, including Wynn Resorts (WYNN) and 3M (MMM). Meanwhile, Best Buy (BBY) had nice earnings but the stock couldn’t capitalize. Marriott (MAR) powered back after delivering on earnings. The company has actually opened a few hotels in China recently, and has 17% of its revenue from Asia-Pacific. The fact that MAR has re-opened hotels, which adds to the idea that some things are turning around in China. A handful of places are re-opening. It’s far from over, but interesting to watch.
If WYNN and MAR are starting to recover a bit, the next areas to consider watching are airlines and rental car companies. However, two airlines got downgraded Thursday by analysts. There’s also some optimism that the virus might lose a little of its vitality in warm weather, so that can’t come soon enough.
Another key stock to watch is Apple (AAPL), because it’s such a bellwether. Is AAPL priced fairly for earnings, or does it need to come down more? People traded AAPL in response to tariffs and now in response to the virus. AAPL got hammered Thursday, falling more than 6%.
It can be dangerous to try to pick a bottom, bringing to mind that old Wall Street warning about “catching a falling knife.” The question on many minds is whether a bear market 20% drop could be in the cards. It’s hard to say, because at this point, there’s no real way to know just how big an impact the virus might have on earnings. You can’t predict the “P” in price to earnings (P/E) without knowing the “E.”
The fear is that even if China gets back on its feet to say, 75% of what it had been, cases in Europe and the U.S. might slow those economies. If all countries aren’t operating at full scale, that’s a concern.
Besides the SBUX news, there was Goldman Sachs (GS) coming out this morning predicting no earnings growth not just for Q1, but for the entire year. The market initially got slammed by the GS report, but looking back, it might have been one of those “always darkest right before dawn” moments for some participants. Whether GS is smart to be so bearish and whether those optimistic investors jumped the gun by seeing things turning around both remain to be seen.
It’s also interesting to see the Atlanta Fed’s GDP Now meter tick up another notch in raising its Q1 U.S. economic growth forecast to 2.7%, up from 2.6% last week. First of all, that’s still way above analysts’ consensus views of around 1.5%, and it’s also kind of a head scratcher that the meter didn’t seem to factor in any virus-related weakness. Instead, the Atlanta Fed’s new language focused on the strong housing market, private investment growth, and exports. The next update will be out tomorrow. Remember, these Atlanta Fed numbers are backward looking and may reflect activity before the virus really picked up steam. The market tends to look forward.
When things were going gangbusters earlier this year, the market was pricing in a scenario where nothing bad would happen. This week it’s gone 180 degrees and is pricing in a worst-case. The reality is probably somewhere in between.
Thinking about why buyers might have shown up this morning, beyond what we’ve already covered, technical levels come to mind. Though it’s not everyone’s favorite sport, keeping an eye on support and resistance levels can give you some sense of the score as you watch the market every day. In Thursday’s case, SPX and the Dow Jones Industrial Average ($DJI) both started the day near or below their 200-day moving averages and down roughly 10% from the recent highs made just over a week ago.
This quick move below those key levels of around 26,700 for the $DJI and 3050 for the SPX appeared to help push the pause button and arrest the wild selling out of the gate. Those levels didn’t hold up later.
Meanwhile, some participants think the Fed is going to do something very soon. Chances of a March rate cut stand at 76%, up from 10% early last week, according to CME futures. There’s a better than 50% chance of at least one additional cut by June.
The 10-year yield is incredibly low at below 1.3%, and seems to be forecasting a rate cut. However, it’s unclear how much a cut would help, or if it would help at all. Also, if there’s any positive news on the virus front, bonds might quickly pull back along with odds of a rate cut. Stocks, on the other hand, might have more of a slog even if the news flow improves because we know Q1 earnings are being affected and Q2 earnings are also coming into question.
It’s quite possible selling could resume tomorrow with many investors probably worried about carrying long positions into the weekend. Six of the last seven Fridays have featured stocks ending lower. If the old support can’t hold, then 3,000 in the SPX (which seemed to hold up today), could become critical. Well below that is another interesting point to watch near 2870, which marks the 50% retracement level from the December 2018 low to this month’s all-time high.
On the other hand, the opposite argument is that today’s really weak close might set us up for some buying on Friday. The market doesn’t tend to do what the crowd expects.
A couple potential bright spots to watch for tomorrow involve the U.S. consumer, which has arguably been the last man standing on the global stage, with much of Europe—and more recently Asia-Pacific—in economic retreat. We’ll get a first snapshot at 8:30 ET when Personal Income and Personal Spending numbers are released.
Ninety minutes later, the University of Michigan releases its Consumer Sentiment index. Last time out, Michigan Sentiment came in at 100.9, just shy of the expansion high of 101.4. While again, these numbers are backward looking, and don’t include the most recent coronavirus-related data, they can still offer a baseline snapshot of consumer health.
CHART OF THE DAY: THROUGH A LONGER-TERM LENS. Looking at a chart using a weekly or even a monthly time frame can help view market action from a longer-term perspective. The weekly chart of the S&P 500 index (SPX–candlestick) with its 200–week moving average (blue line) shows the overall long-term trend is still bullish, with the 2630 level as support. The 200-week acted as a support level back at the end of 2018 when the weekly low bounced off it. In early 2016, the weekly low came pretty close to the 200-week MA before SPX continued its uptrend. Data source: S&P Dow Jones Indices.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Finding Values? One bullish thing we’re starting to hear has to do with valuations. Before this crazy week began, a lot of people were pointing to the SPX’s historically high forward P/E above 19 as a possible issue. Now the P/E is back to around 17.5, so there’s probably going to be some who say stocks are more fairly valued.
That’s not necessarily true, especially if GS is right about earnings. A week or two ago, most analysts were penciling in mid- to upper-single digit earnings growth in 2020. If the “E” is actually going to be zero, then the “P” might still be relatively high. In other words, let’s not count our P/E’s before they hatch, so to speak, especially because companies might be coming out soon with more downward guidance revisions as the virus damage continues. Earnings drive prices, and it’s still too early to know how earnings might be affected.
Watching for Green Shoots: What would one possible sign be of things getting better? Maybe seeing some of the hardest-hit stocks start climbing back. Those include the transports, hotel, and casino stocks, and microchip makers. When loss leaders start getting a bid, it could reflect investors getting less worried about the macroeconomic situation. This is separate from seeing a few of the high-flyers like Tesla (TSLA) or Virgin Galactic (SPCE) get a bounce, which might just reflect people seeing opportunity to jump into some of Wall Street’s “darlings” at a price that looks better than what they saw a few weeks ago. Instead, it might be wiser to keep an eye on the more everyday stuff like airlines, hotels, restaurants, and semiconductor companies if you want a better sense of where things could be headed.
History Tour Lends Hope: Henry Ford once said, “History is bunk.” Maybe he was right, but it doesn’t mean we can’t take some market lessons from the past. For instance, since 1980, the market has had 37 corrections (drops of 10% or more from highs), and has rebounded from every one. Since World War II, the average correction has seen major indices fall 12% to 13%. The lows today are right around that compared with the peak hit on Feb. 18.
While none of these historical markers have any guarantee of being repeated—and there’s still a chance this could become extended and turn into a bear market with 20% losses—nervous investors might want to remember we’re close to levels where support typically got found in the past. It can even be healthy to have this sort of shakeup every now and then, as some analysts felt the recent rally got out a little over its skis from a valuation standpoint.
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