Economics

10 Year Yield Falls Below 1% In Monumental Rally

2020epsestimates

Another Wild Day For Stocks

The stock market had a very wild day as it was down in the morning, briefly rallied after the Fed’s emergency cut, and then crashed sharply. In markets volatility clusters which means when the previous day had high volatility, the next day has a greater than average likelihood to also have a big move. Many thought the situation was closer to being under control, but that hasn’t occurred yet. Personally, I’d buy stocks if they hit a new low.

Specifically, the S&P 500 rallied 2.2% from 10AM to 10:05AM because of the Fed’s announcement. From that peak to the trough at 2:10PM, the S&P 500 fell 4.84%. That’s a massive move. The market completely ignored the Fed’s emergency cut after 5 minutes. 

First emergency cut in 11.5 years was met with a shrug. That’s what happens when rate cuts are already priced in and the market is fears a global pandemic. Now the market is expecting 1 cut on March 18th, not 2. That can easily change though.

Review Of The Big Selloff

Obviously, the volatility is part of the story. Anther side is simply that stocks fell; they didn’t continue Monday’s momentum. Coronavirus pandemic risk was likely a big factor. Super Tuesday election may have caused some uneasiness as well. Heading into Super Tuesday, it looked like Biden and Sanders were the 2 front runners. 

Afterwards, it looks like Biden will win. Judging by the futures market’s reaction to his great night (stocks rallied), some investors may have sold stocks on Tuesday because of this.

S&P 500 fell 2.81% on Tuesday as it gave back much of Monday’s rally. Nasdaq was down 2.99%. The Russell 2000 was only down 2.13% after it dramatically underperformed on Monday. It’s impressive it didn’t fall more given the huge decline in treasury yields. 

VIX was up 3.4 to 36.82. It’s likely it will be much lower in about 2 weeks at the latest. CNN fear and greed index fell 3 points to 10 which signifies extreme fear. This is usually a sign the bottom is close. S&P 500 is now down 7.04% year to date. 

With Sanders unlikely to be elected President, stocks should rally roughly 7% this year if it wasn’t for the coronavirus. It’s generally good to be  a buyer of stocks near correction lows. But as they rally, it gets tougher to own them. We don’t know how badly 2020 earnings will be impacted.

As you can see from the chart below, Q1 EPS growth is expected to be -0.73%, but Q3 EPS growth is expected to be 7.43%. Personally, I think Q3 EPS estimates will come down hard in the next few weeks. Total 2020 EPS growth might be less than 5%. Goldman Sachs has a base case scenario where EPS growth is 0%.

Every sector fell on Tuesday. Biggest losers were the financials and technology which fell 3.73% and 3.79%. Banks were destroyed by the big rally in treasuries. Fed’s rate cut didn’t help them even though it was priced in. 

For example, Wells Fargo stock fell 4.09%. It now has a 5.03% yield. That’s about 5 times the yield of the 10 year treasury bond. Utilities and real estate only fell 1.16% and 0.1% because of the decline in yields.

Monumental Rally In Treasuries

We continue to be shocked by the rally in long bonds. TLT, which is a long treasury ETF, rose 1.55% to a new record high. With the Fed’s rate cut, we are seeing a decline in the dollar and a decline in treasury yields, not that the treasury market was selling off before this. The chart below shows, in the following 50 days after 4 of the past 6 emergency rate cuts, treasury yields increased. 

It would take a trend reversal for the 10 year yield to rise in the next 50 days. 10 year yield is currently at 97 basis points which is a new record low. 377 stocks in the S&P 500 have a higher dividend yield than the 10 year treasury. 30 year yield is also at a record low as it’s only at 1.61%. 2 year yield is at 66 basis points as the market is already pricing in one more rate cut on March 18th and is looking for more.

3.4% Mortality Rate

Last week scientists concluded the mortality rate of the coronavirus was 2.3%. On Tuesday, the WHO upgraded that to 3.4%. On March 3rd, the number of new cases outside of China rose from 1,734 to 2,453. That spike followed a slight decline on the 2nd. The situation isn’t getting better yet. 

As predicted, the percentage of total cases in countries outside of China rose above 10% as it’s now at 13.87%. Next stop is over 20% later this week as the number of cases in China is growing slowly. There have now been 9 deaths in America which is a small percentage of the total. But obviously worth following the closest. As you can see from the chart below, the new baseline is just 1.3% GDP growth in 2020.

Biden Wins Super Tuesday

The presidential race isn’t over, but it’s getting close. That’s because Biden won 10 states and Sanders won 4 on Tuesday. As of Tuesday night, Biden had 450 delegates and Sanders had 377. If Bloomberg drops out in the next few days, Biden will likely garner enough votes to end the election quickly. It will be exciting to see 538’s new odds calculation on Wednesday. 

PredictIt shows there is a 72% Biden wins a 16% chance Sanders wins. Healthcare insurance ETF dropped 3.65% on Tuesday. That will likely turnaround on Wednesday now that Biden is strongly in the lead. I’m surprised the industry dropped since the early indications were good for Biden. 

The post 10 Year Yield Falls Below 1% In Monumental Rally appeared first on Theo Trade.

Source: First Rebuttal

Follow us:
Visited 7 times