Selloff Continues, But Velocity Slows
The stock market continued its losing streak on Wednesday as it has been down 5 straight days. Traders are loving this. If you have a time horizon of more than a few weeks, this is a great buying opportunity. S&P 500’s valuation is coming more in line with reality. There’s nothing like a nearly 8% correction to make stocks look a bit cheaper.
S&P 500 is down 3.54% year to date. I’m not saying this is the buying opportunity of a lifetime like the market was in March 2009. It’s just that in the next year, I’m becoming more confident stocks will have solid gains. That is, as long as Sanders doesn’t get elected President. If he does, stocks probably move lower.
WTI oil is down to $48.05. Once demand regains its footing following the coronavirus, prices will move higher. Many oil projects can’t reach profitability at these levels. OPEC can easily cut production if prices are below where they want them to be.
It’s doubtful that OPEC is happy with oil in the $40s. On Wednesday, the S&P 500 was down 0.38% on coronavirus fears again. VIX actually fell 0.29 to 27.56 as there needs to be sharp S&P 500 declines to keep it in the high 20s.
CNN fear and greed index was down 1 point to 21. The market tried to rally, but lost steam. Yet it’s unlikely that the market is out of control or that there is panic yet. If stocks crash on Thursday, then there is panic since we’d be down about 10% in 6 days.
Most see this situation as a correction, not the start of a bear market. As you can see from the chart below, put volume hit the highest level since February 2018 when the VIX spiked. If traders panic on Thursday, this could hit the highest level in at least 7 years.
Details Of Wednesday’s Action
Pre-market shows stocks will fall on Thursday. But I’ll stick to what has already happened in this section as markets can reverse. Nasdaq was up 0.17%, but the Russell 2000 fell 1.22%. Nasdaq might get hit hard on Thursday because Microsoft issued a warning that it would miss its guidance because of the coronavirus. Its stock fell 1.98% after hours.
The firm stated, “Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”
It’s arguably good news if a firm lowers guidance because it means the bad news has already come out. Most firms will likely issue an update on their guidance if they haven’t already.
Also, the only sector that rallied was tech which rose 0.4%. Energy was the biggest loser again as it fell 2.97%. Exxon Mobile fell 2.2% and now has a dividend yield of 6.56%. It’s amazing that this company, which was once the largest in the world, now only has a market cap of $224 billion. And, it’s less than a quarter the size of the internet giants. Furthermore, it’s down 33.3% in the past year. Exxon is only a buy if you think oil will move up. It doesn’t do well with oil in the high $40s.
Current long bond market is the most remarkable thing I’ve seen in my 13 years of following markets. 10 year yield has fallen to just 1.3% which is a record low. Investors are now pricing in 3 rate cuts this year. 2 year yield has fallen to 1.13%. 30 year yield has fallen to 1.79% which is another new record low. Now, I’d be a seller of the long bond as the panic here has gone too far. 30 year yield is barely above the 1 month T-bill which has a yield of 1.58%.
Update On The Coronavirus
Coronavirus fears have caused traders to sell first and ask questions later. New cases in China are less of a concern than the number of new cases in the rest of the world. On February 26th, there were 433 new cases and 29 new deaths in China. That brought the total to 78,497 cases and 2,744 deaths.
As you can see from the chart below, in mid-February economists were asked how much the coronavirus will hurt 2020 GDP growth. 76% said it would impact GDP growth by 0.8% or less. More would say it will have a greater impact if this survey was done today.
South Korea stated there were 334 new cases which brought the total to 1,595. There weren’t any new deaths thankfully. Ironically, the Shanghai Composite has been the best place to invest in the past month. That’s because traders in this market took the virus seriously and the picture is getting better. Investors in markets in the rest of the world ignored the threat until recently.
Italy has the 3rd most cases as there are 470. I think the number of cases in Iran will be upgraded because there have been 19 deaths and only 139 cases. Globally, the number of new cases on the 26th increased from 741 to 1,000. That was the most new cases since February 18th.
The chart below shows the expected impact on U.S. 2020 GDP growth. As you can see, the new base case scenario for 2020 GDP growth is 1.5% which is 0.2% lower because of the virus. If the virus spreads globally like it did in China, America’s GDP growth could be hindered more in Q2 than in Q1.
Atlanta Fed Nowcast actually sees 2.6% Q1 growth which won’t happen. I expect near 1.5% growth. It’s hard take the expectation for -0.1% growth due to a global pandemic seriously because you can’t model such an event.
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