Massive Selloff To Start The Week
The stock market fell the 7th most in one day since WWII. This is the 5th greatest decline many have ever seen. As you can see in the table below, the 7.6% decline lagged the 1987 crash and the financial crisis. This crash is amazing because in context, the coronavirus doesn’t come close to the uncertainty during the financial crisis. There was a legitimate chance AIG and Citigroup among other big banks were going to fail.
Now we have a virus that has killed 4,000 people and is temporarily suspending travel. It’s highly likely that the travel ban in Italy won’t last more than a few weeks. This is by default a temporary negative unlike the financial crisis which could have done lasting damage. It already took years to recover from the crisis. If AIG had failed, the recession would have actually rivaled the Great Depression.
It’s clear, this situation, while a human tragedy, isn’t as bad as 2008. Likely, the stock market has fallen quickly because markets move faster now than ever before. Movement shouldn’t be as large (in total), but there will be quick moves. That explains the stock market having big declines off record highs in the past few years.
They say topping is a process, but it has occurred quickly and without warning recently. Market moves won’t be greater in the next few years because the consumer is in good shape and valuations aren’t crazy. Even at the peak, they were only modestly high. Plus, beating out the 2000 and 2008 crashes isn’t easy.
You can see the mass panic in stocks played out in the chart below. There has been indiscriminate selling which provides perfect opportunities to pick your favorite stocks that usually don’t go on sale. As you can see, the financials fell 27.1% because of the decline in rates and energy fell 45.6% because of the decline in oil prices.
Personally, I like buying the beaten down names that haven’t had anything extremely bad happen to them. Unlike energy which justifiably should be down significantly.
Details On Monday’s Panic
S&P 500 fell 7.6% which means it’s now down 14.99% year to date. It’s down about 18.9% from the top. We are just over 1% from a bear market. There is always a debate on whether the bull market that started in March 2009 really is still going since we had an almost 20% decline in Q4 2018. Now we have the opportunity to end that debate if stocks fall another 1%. This was a massive panic regardless of whether it ends up turning into a bear market.
VIX rose 12.52% to 54.46. It will fall soon, but don’t bet on that happening because that’s already priced in. Everyone knows it will fall, which is why you can’t make money on that trade. Nasdaq fell 7.29%. Russell 2000 fell an enormous 9.37% because it is a bank heavy index. It also fell because now it’s actually riskier to own domestic firms since America might be the most at risk nation to the coronavirus.
CNN fear and greed index fell 4 points to 3 which is extreme fear. It can’t fall much further. Normally, I’d say go all in on stocks because fear can’t get worse. But the coronavirus is difficult to predict other than that it will be temporary. It won’t be an issue a few years from now. However, the next few weeks are scary.
Even if stocks open up, they can fall if a state like New York goes into lock down. As you can see in the chart below, stocks rally 86% of the time for an average return of 3.84% when the index goes below 8. There aren’t many data points to go off of if you just looked at 3 and under. Personally, I’m bullish on the intermediate term, but this might not be the correction bottom.
A rally in treasuries has been a bigger story than the correction in stocks. 10 year bond yield hit 38 basis points. It’s very close to negative. Fed will likely cut rates substantially on March 18th (a full point). 30 year bond yield fell to 69 basis points. The chart below shows the 59 basis point decline on Monday was the largest since 1998.
Biggest Oil Decline Since 1991
This was a terrible time for OPEC+ to fail to make an agreement because it helped cause the mass panic. WTI fell 24.59 to $31.13 and Brent fell 24.1% to $34.36 which was the worst decline since 1991. Russia didn’t agree to the 1.5 million barrels per day cut starting in April.
Meaning, Russia and Saudi Arabia are in an all-out price war. This is bad news for U.S. shale drillers. As you can see, WTI fell below the price it takes to make a 10% profit in all the shales.
Italian Shut Down
25% of the Italian economy went into lock down on the weekend which spooked markets. On Monday evening Italy announced it expanded that lockdown to the whole country. On March 9th, the number of new coronavirus cases outside of China rose from 3,852 to 4,371.
A scarier aspect was the lack of a plan in America which isn’t giving enough tests. It was also scary that on March 8th, the number of global new deaths rose from 105 to 228 which was the highest ever. It fell to 198 on March 9th. The chart below shows Korea and Italy might be a week from seeing the growth in cases moderating. Unfortunately, to get there Italy’s economy had to be shut down.
The futures market rallied on Monday evening. Mostly because President Trump floated a plan to cut payroll taxes and support the industries in despair. Industries such as the travel industries like airlines and cruise ships.
New York unveiled a new hand sanitizer which is cheaper than Purell and is actually available for the government to use. New York City is giving out interest free loans and cash grants to businesses who have seen a big drop in sales because of the coronavirus.
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