Loading...
 
Before The Bell -  The U.S. and global equity markets remain under severe selling pressure, the likes of which have not been seen since the time of the financial crisis in 2008. Investors’ confidence has been rocked by escalating fears about the coronavirus pandemic, which has spread rapidly across this country, with the nation’s largest cities under orders to practice “social distancing”. The calls for nonessential workers to remain at home and for forgo public gatherings, especially in New York and California, will undoubtedly punished the U.S. economy in the coming months. The looming recession and the forthcoming massive bailouts from the government have unnerved the investment community, with the CBOE Volatility Index (or VIX), also known as the “fear gauge” skyrocketing since the last week of February. Today is looking like another volatile day is in store for Wall Street (see below).

Last week was another miserable five-day stretch of trading for those long equities. The week started off with another emergency interest-rate cut by the Federal Reserve, which unnerved investors. It played a part in the largest one-day point setback for the U.S. stock market since 1987, with the Dow Jones Industrial Average plummeting nearly 3,000 points last Monday. Over the next three days, investors were taken on a rollercoaster ride, but the undertone to trading remained highly bearish, with the week culminating with another sizable selloff on Friday (more than 900 points on the Dow).

Investors have had few places to hide in an equity market that has been under severe stress on deadly COVID-19 concerns. Weighing on the market is the likelihood that the nation is headed into a recession, which is defined as two consecutive quarters of GDP contraction. Many economists predict that the setback could be in the double-digit percentages range in the second quarter. The data from Corporate America will likely be equally as dour, with earnings for the majority of the S&P 500 companies expected to tumble. The recent rash of dividend cuts or suspensions are foreshadowing the rough times ahead for many U.S. corporations. This, along with concerns that many industries (i.e., airliners, oil and gas, recreation, and restaurants) and U.S. citizens will need to be given financial assistance from the federal government, has investors running away from equities and into fixed-income securities. The flight to bonds has pushed yields to historic lows. In the equity market, stocks of some of the retailers that rely heavily on online services have fared relative well, while the mass merchandisers, club stores, and grocery stores, and the food processors that supply those chains, are benefiting from individuals and families stocking up on food and essentials items.

The question that was posed to Wall Street pundits following the monumental selloff last Monday was: where’s the bottom in this bear market? Given the all the uncertainty, both with regard to public health and the plight of the staggering economy, we are not confident that we have seen the last of the selling. Some pundits think that the S&P 500 Index at 2,000 would be a technical level to watch, and if so investors will have to endure some more pain in the weeks to come. That said, those that are in the market and have a long-term investment horizon should probably stay the course, as history has shown that rapid stock market declines have often been followed by nearly as big rallies. During these difficult times, we would recommend that investors look at stocks under Value Line’s coverage that are ranked 1 (Highest) or 2 (Above Average) for Safety. Those equities have historically outperformed the broader market in deep bear markets, which we are in right now with the Dow Jones Industrial Average down more than 30% year to date.

Before the bell, the equity futures have been highly volatile. S&P futures fell sharply just minutes after overnight trading opened at 6:00 P.M. (EDT) Sunday, hitting the daily lower limit to prevent further extreme losses. The primary culprit was a failed procedural vote on a stimulus package debated in the Senate. However, the futures reversed course this morning after the Federal Reserve, following a third emergency meeting this month, unveiled several new and extensive measures that would expand the central bank’s efforts to calm corporate debt markets. The Fed also said a direct lending program to businesses will be announced soon. Investors will continue to weigh the escalating virus against the proposed massive monetary and fiscal stimulus packages designed to mitigate the ongoing crisis. The pandemic has pushed stocks from record high levels to bear market territory in a record time. Stay tuned and be safe.   - William G. Ferguson 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.