Causes Of The Decline (Coronavirus/Sanders)
January 2020 looks a lot like January 2018. There was volatility at the end of each month as the market had previously reached a euphoric state. This current decline is occurring during earnings season, just like 2 years ago and just like 2018 earnings aren’t the reason stocks are falling.
It makes sense to buy stocks that reported good earnings, but have declined because of the market volatility. Obviously, it always makes sense to buy the best stocks that get thrown out with the whole market. But during earnings season, you have a unique opportunity to know exactly which firms have been doing well recently. There’s less risk.
Headlines blame the coronavirus for the decline. But the rise of Sanders in the polls and the fact that stocks got expensive also may have played a role in this recent correction. With the 3.2% decline from the peak, many are no longer very bearish on stocks, but not hugely bullish either. S&P 500 is down 0.16% year to date and I predicted a 4% gain this year. More stocks fall, the more optimistic I get.
On the one hand, the coronavirus won’t cause a lasting impact to the economy. On the other hand, stocks haven’t come close to pricing in Bernie Sanders winning the election. I’m not saying he will win, but there is currently a 29% chance he will win on PredictIt.
If him winning causes stocks to fall 20%, stocks need to fall 5.8% to price in his odds (expected value). Obviously, that’s a crude assessment of what could happen. He will raise taxes on the rich, regulate the banks more heavily, eliminate private heath insurance, and potentially break up the big tech firms.
Once he wins a couple states, there will be a ton of research on this as the market grapples with it. Personally, I’m getting in ahead of time by saying stocks will fall as he does well in the primary. Generally, markets fall and ask questions later, like what’s happening with the coronavirus.
Coronavirus Becomes More Intense
The coronavirus has gotten more intense recently as the death toll has hit 259 and the total number of confirmed cases has risen to 11,791. The graphic below shows the coronavirus compared to other illnesses. It has a fatality rate below 3% and infects 1.5 to 3.5 people for every one person that has it.
A key for the global economy is how long it keeps spreading because it is shutting down business and travel. Italy declared a state of emergency after 2 cases were confirmed in Rome. Hopefully, the spread ends quickly.
Details Of The Decline
Investors are starting to extrapolate the weak January onto the rest of the year. While stocks only fell 16 basis points, that was enough to trigger the statisticians. When stocks are up in the first month, the rest of the year is up 78% with an average gain of 8.6%.
When stocks fall in January, the rest of the year is up 58% of the time with an average gain of 2.5%. Stocks would have been more expensive had they increased. Obviously, you shouldn’t make investment decisions based on 16 basis points. If stocks sold off on Monday, February 3rd instead of Friday, does it matter? To me it doesn’t, but the stats are interesting.
To get to a decline on the month, the S&P 500 fell 1.77% on Friday. Nasdaq fell 1.59% even though Amazon rose 7.38% on its great report. Russell 2000 fell 2.07% because the long bond is in free-fall. I only predicted a modest increase in the 10 year bond yield by the end of the year. But so far I’ve been way off because it has cratered. It fell 8 basis points to 1.51% on Friday.
2 year yield fell 10 basis points as investors are predicting more rate cuts are coming this year. CME Group shows there is a 61.1% of at least 2 cuts this year. Many are predicting 1 cut. Odds of a cut in March have increased to 26.6%. 30 year yield fell 5 basis points as it is just 10 basis points from its record low (1.9%). VIX was up 3.35 to 18.84.
Every sector fell except consumer discretionary which rose 0.82% because of Amazon. Energy sector was crushed 3.18% and the tech sector fell 2.72%. Energy was hurt by Exxon Mobile and Chevron which fell 4.09% and 3.82% on weak earnings reports. This quarter will be even tougher for them because oil has been falling. Oil’s decline from $63.27 on January 6th to $51.56 today will act as a minor stimulus for the consumer which is confident after a modest December.
Finally, there is some fear in the market. AAII investor sentiment survey shows there are more bears than bulls for the first time in 15 weeks. Percentage of bulls fell 13.6 points to 32% and the percentage of bears rose 12.1 points to 36.9%. CNN fear and greed index fell 16 points to 44 which is fear.
Latest Democratic Polls
Bernie Sanders now has a 42% chance of winning the primary while Biden is at 32%. IHF healthcare industry ETF fell 2.41% on Friday. It’s down 7.11% since the 22nd. United Health stock is down 9.41% since the 16th. There were 3 polls released on Friday.
Sanders is up by 5 points on Biden in Washington. There were 2 national polls. One showed Sanders up by 1 point and one showed Biden up by 7 points. Average of recent polls has Biden up by 5.4%. Biden hasn’t fallen in the national polls; Bernie has risen in them.
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