Before The Bell - Since the inception of the U.S. stock market more than a century ago, the one thing that has always roiled the investment community has been uncertainty. And to say that traders have had to deal with a lot of unknowns these days would be a severe understatement. The coronavirus pandemic, which has crippled much of the U.S. economy over the last fortnight as the deadly virus has spread across the country, now from California to New York, has cast a cloud of uncertainty over the U.S. equity market. In response, stocks have fallen into bear market territory after a more than decade long bull run that saw some small corrections, but none the size of what we experienced the last three weeks.
The coronavirus fears and falling oil prices, the latter the result of bickering over production levels between OPEC and non-OPEC leaders and now weak demand as more people practice “social distancing” at the government’s request, have resulted in the major selloff we have witnessed on Wall Street and across the international equity markets. It included the worst session for The Dow Jones Industrial Average since Black Monday in 1987 last Thursday. The index of 30 bellwether companies fell more than 2,000 points and with one day left of trading last week was down nearly 30% since hitting an all-time high earlier this year. News that all of the major sporting leagues were suspending their operations, which will have serious negative consequences for the near-term performance of the U.S. economy, rocked the investment community. The market did rally last Friday, recovering nearly 2,000 points on the week’s final trading day, as traders liked President Trump’s comments that the government was set to act aggressively with a major stimulus package more than his remarks last Wednesday night. President Trump’s comments on Friday afternoon at 3:00 P.M. (EDT) followed a decision by the central bank earlier in the week to pump $1.5 trillion into the financial sector, which included lowering the overnight repo rate to add liquidity to the financial system.
These drastic fiscal and monetary measures (the central bank, which commences its two-day monetary policy meeting tomorrow, made another emergency interest-rate cut, reducing the federal funds rate to 0%-0.25% this morning) will likely be necessary to support a domestic economy that could potentially be ravished by the coronavirus. This weak, and frankly unchartered economic environment will likely hurt first-quarter earnings season and may punish June-quarter results. In addition, to the air and cruise line industries, Wall Street now expects the earnings data for most of the consumer-driven industries to be quite troublesome over the next few quarters. The shutdown of the multi-billion dollar sporting industry is likely to have far-reaching negative consequences for both the business beat and Corporate America. It would not surprise us if the earnings data from the commerce and consumer (i.e., retail stores, hotels, restaurants, and gaming venues) sectors made for very difficult readings over the next few quarters. Conversely, the mass merchandisers and grocery stores, along with the food processors that supply these outlets, may get a nice boost from individuals and families loading up on both food and essential products needed to stay at home.
The major anxiety in the equity market over the last three weeks (the CBOE Volatility Index has soared) has tested the mettle of traders. In fact, many investor have invoked a “flight-to-safety” strategy that has resulted in the swift movement of funds out of stocks and into bonds. The investment community’s recent desire for bonds has pushed the rates on fixed-income securities to record lows. In fact, the yield on the 10-year Treasury note, which moves inversely to the price and is used to set long-term rates, fell to a record low during last week’s bearish trading stretch. Despite, the nearly 2,000-point rally for the Dow 30 on Friday, the blue-chip index was down 10.3% for the five-day stretch. The NASDAQ Composite and the broader S&P 500 Index moved lockstep with the Dow last week, but the biggest laggard was the small-cap Russell 2000 (-16.5%). The prevailing sentiment was that the spreading of the coronavirus stateside may cripple the businesses of many of the domestically dominated companies over the next few quarters.
Before the opening bell, the equity futures are pointing to a resumption of the sharp selling that we saw for much of last week. The uncertainty caused by the coronavirus continues to unnerve investors. Equity market participants should get ready for another volatile session of trading today, one with a number of twists and turns for stocks as more news about the coronavirus and its impact surfaces. Stay tuned. – William G. Ferguson