S&P 500 Weekly Update: A Good Dose Of Fear And A Void In Common Sense
Summary
- Keeping it all in perspective, we put the pieces together to weather this storm of FEAR.
- The Fed cuts rates, and the 10-year Treasury drops under 1% as the investment community sees the economy crashing.
- The "virus" rhetoric is doing its best to talk the economy into a recession.
- The headlines have created a "perception" that may be far different than the "reality" of the situation.
- Looking for a helping hand in the market? Members of The Savvy Investor get exclusive ideas and guidance to navigate any climate. Get started today »
"The most important consideration when investing in the stock market is the primary trend of the equity markets."- Richard Russell (Dow Theory Letters)
When it comes to investing, my strategy does not include speculation or emotion. Over the years spent here on Seeking Alpha, I have done my best to explain why that is the only way to approach the markets. This week the first draft of this article contained quite a bit of information regarding the global health scare surrounding coronavirus.
As each day unfolded, it became more and more apparent that there would be no need to include any of that in this week's missive. Speculation, fear and overall emotion trump ANY other view presented, including facts. It became apparent that it wasn't necessary to spend time over an issue that is out of my control. So it's back to what successful investors do and what has helped in reaping the lion's share of this 11-year bull market. Watch the price action.
When the initial outbreak of the coronavirus occurred in January, the financial markets were forecasting a quick "V" shaped recovery similar to that of previous viral outbreaks. As investors watched the number of coronavirus cases in China rise to the 80,000 level, the S&P 500 went on to record 13 new record highs, finishing that run at S&P 3,386.
By all measurements, the indices settled into overbought territory, very similar to what we saw in January of 2018. Back then the rally in the first month of 2018 resulted in a peak to trough correction of 11.8%. On that occasion, it was an overbought market that ran into nervous nellies who feared the devastating impacts of tariffs.
However, once the number of cases outside China moved sharply higher, sentiment changed and the S&P 500 experienced its first 10.0%+ correction since December 2018 and the fastest 10% decline from record highs in history. Perhaps it also was an extremely overbought market that simply needed to pause and nothing more. That fact has been overlooked by many due to the virus issue.
ALL during this BULL market, I viewed such pullbacks as buying opportunities, emphasizing solid fundamentals that remained supportive of the equity market. Stable economic data, shareholder-friendly corporate actions and attractive valuations in this low interest rate environment.
Remaining confident during last year's trade-related pullbacks paid off handsomely as it was best to stay with unwavering conviction that the Tariff situation was overblown and would NOT be the "devil" that many forecasted. That turned out to be a very easy call. It was based on facts, not speculation, emotion, nor bias.
That same strategy applies today. Unfortunately, the potential complications surrounding the coronavirus are more unpredictable and have made investors much more emotional. It is the explosive FEAR component associated with this virus selling that is more concerning. That FEAR is repeated to market participants on an hourly, daily and weekly basis. There is simply no escape from it. My concern isn't with what I foresee as potential global economic impacts. For sure there will be many. My concern lies with the uncoupling from reality that the never-ending fear rhetoric is adding to the storm.
Whether it comes to investing or life in general, perspective is a very important component of how we proceed. Perspective reminds us to remember where this market has been, where it rallied to and where it stands today after an avalanche of bad news. Connect the dots, and until proven otherwise, this is a 12% correction. Not many are talking about that as a scenario.
Investors now have to consider if this event is more transient, where the train gets back on the track fairly quickly or whether it has devastating impacts that derail the entire global recovery and bull market that has been here for 11+ years.
I'd rather deal in facts. Emotion and speculation have no place in the investment scene. At the moment, the latter is in control and that is the most frightening part of this "event".
As you go through the fundamental data that follows, it confirms what was being forecast here and by the market as indices ran to new highs. Global data was improving. If nothing else it's in a better place to absorb the impacts of the virus rather than the extreme lows.
I also realize using facts to debate any of the FEAR bombasts is a fool's errand. All any objective analyst can do now is present facts using common sense. Ironically, that is also the way to successfully manage money.
Since the market was completely washed out entering this week, many thought a rally could be in the cards.
Source: Bespoke
The S&P 500 was more than three standard deviations below its 50-day moving average, more than 85% of S&P 500 stocks were oversold, and equities were underperforming Treasuries by their widest margins in nearly a year.
A rally yes, but not many believed the first trading session would have resulted in a 4+% move in the S&P and Nasdaq, with the DJIA adding 5% for the day. That was the largest one-day gain since the end of the Global Financial Crisis. Just as the most recent series of declines were far too fast and far too large to be a rational assessment about the outlook and were instead a function of positioning unwinding in terrifyingly fast fashion, the move on Monday was the same in reverse. Translation; the irrational selling was met with irrational buying.
"Super Tuesday" was not so super for anyone bullish. Volatility ruled with the wild intraday swings continuing on Tuesday. A 1,200+ point swing in the DJIA accompanied by a 150 point intraday trading range for the S&P. The Dow gave back almost 3% of the previous day's gain, while the S&P shed 2.8%.
The Bulls used "Super" to describe the rally on Wednesday, with the Dow 30 and S&P regaining all of the 3% losses on Tuesday and then added more to the gains. According to many, all of the gains were chalked up to Mr. Biden's big wins in the Democratic primaries. The market unfriendly Mr. Sanders may now be relegated to try and play catch up, and that went over well with investors. Perhaps it was also a much oversold condition that persisted after the rout on Tuesday.
All anyone needing to know where equities were headed could get that answer by watching the action in the 10-year Treasury note. A free fall under 1% down to 0.7% at the lows. The mindset in place now says the headlines are likely to get worse before they get any better. Investors were once again in no mood to buy equities heading into a weekend. However, a late day rally surprised just about everyone.
The only folks that got beat up this week were the geniuses that decided to play the hourly and daily trends. I suspect this is the same army of rocket scientists that have been hedging at every major market high, all 47 of those highs since January 2019. The DJIA was up 1.7% for the week, while the S&P 500 and Nasdaq Composite were flat, gaining 18 and 8 points respectively.
The price chart of Europe's STOXX 600 is something to behold. Less than a month after hitting 52-week highs, the index is now knocking on the door of 52-week lows. It's rare enough to see this type of a reversal in an individual stock, but for a benchmark equity index of an entire continent, it's simply astonishing.
Source: Bespoke
It is the same situation, an extended market that was forecasting an accelerating global economy meeting FEAR over global health concerns.
Ironically, the initial source of the fear contagion, China, continues to be a bright spot on the global market scene. China's CSI 300 (ASHR) has now fully recovered all of its losses from the coronavirus outbreak after another week of gains. The index sits near its 52-week highs.
Source: Bespoke
Economy
In a moment of perfect timing, Scott Grannis lays out his reason for why the Fed needed to cut rates before it did.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers' Index posted 50.7 in February, little-changed from the "flash" figure of 50.8, and down from 51.9 seen at the start of the year. The improvement in the health of the manufacturing sector was the weakest since last August and only marginal overall.
Chris Williamson, Chief Business Economist at IHS Markit:
"Manufacturing production and order book trends deteriorated markedly in February as producers struggled against the double headwinds of falling export sales and supply chain delays, both in turn often linked to the coronavirus outbreak. Any growth in sales was once again largely driven by domestic consumers, though even here the rate of growth was weakened considerably compared to late last year."
"Historical comparisons against official data indicate that the survey is consistent with factory production and orders both falling at annualized rates of around 3%, with manufacturing jobs being lost at a monthly rate of roughly 20,000. While trade war fears have eased, helping push firm's expectations for future growth to the highest since last April, coronavirus-related supply chain issues threaten to constrain production in the coming months."
"At the same time, companies have become increasingly concerned that the COVID-19 outbreak will also hit demand, which is reportedly already cooling amid uncertainly leading up to the presidential election. Recent stock market volatility could also further dampen consumer spending and deter business investment."
Nonfarm payrolls surged 273k in February after climbing a revised 273k (was 225k) in January and 184k (was 147k) in December (for net 85k in upward revisions). The unemployment rate fell back to 3.5%, a 5-decade low versus 3.6% previously. The labor force declined -60k versus the prior 50k gain. Household employment bounced 45k from -89k. Earnings rose 0.3%, with a steady 3.0% y/y growth rate. Hours worked rose to 34.4 from 34.3. Private payrolls jumped 228k (ADP was 183k).
Since this report is in the rear-view mirror, and with emotion in control, the consensus view depicts the numbers as meaningless. That appears to be fear and speculation talking. Therefore, I am in disagreement with that conclusion.
Global Economy
The OECD cut 0.5% off of its 2020 global year-over-year growth forecast, including the potential for negative GDP in Q1 of the year. The organization based its call on the epidemic peaking this quarter, but based on rapid and in many cases accelerating case counts across several countries that may be overly optimistic.
It is also noteworthy that the OECD "urges coordinated action if the situation worsens" concerning both fiscal and monetary policy results. That dovetails market pricing for multiple cuts to US policy rates at the next meeting, as well as BoJ and BoE comments that indicate a willingness to ease policy near-term based on financial markets pain.
The J.P. Morgan Global Composite Output Index, which is produced by J.P. Morgan and IHS Markit in association with ISM and IFPSM, fell to 46.1 in February, down sharply from 52.2 in January and its lowest level since May 2009. The more than six-point drop in the headline index was the second sharpest in the survey history, the current record was set in October 2001 (the month directly following the 9/11 attacks). This time the culprit was coronavirus in China.
Olya Borichevska from Global Economic Research at J.P. Morgan:
"The outbreak of COVID-19 disrupted global economic activity in February, with output and new business falling to the greatest extents since mid-2009. However, a lot of this owes to China where the composite PMI fell 24-pt as rates of decline in activity and new orders accelerated to survey records at manufacturers and service providers alike. The rest of the world fell a bit more than two points to near-stagnation though we expect further declines as long as the disruptions continue. Business sentiment held up better, staying close to January's nine-month high."
Operating conditions in the eurozone's manufacturing sector continued to worsen during February, but only marginally and at the weakest rate for the past year. The IHS Markit Eurozone Manufacturing PMI, which is adjusted for seasonal factors, recorded 49.2 in February, up from January's 47.9 and slightly above the earlier flash reading.
Chris Williamson, Chief Business Economist at IHS Markit:
"Despite widespread reports from companies that the coronavirus outbreak disrupted supply chains and hit foreign sales, resulting in considerably longer lead times and a steepening drop in export orders, February saw encouraging signs that the eurozone's manufacturing downturn is easing. Production contracted at the slowest rate for nearly a year and, despite lost export sales, new orders fell at the weakest rate for 15 months amid signs of rising internal demand, notably from consumers."
"The concern is that coronavirus-related delays in shipments threaten to constrain production in the coming months, prolonging a downturn that already extends to over a year. Supply chains are lengthening to an extent not seen since 2018 and inventories are being depleted at a rate rarely seen over the past decade as companies struggle to produce enough to satisfy order books."
The IHS Markit Eurozone PMI Composite Output Index was unchanged on the earlier flash reading in February, recording a level of 51.6. That was an improvement on January's 51.3 and signaled the strongest expansion of the euro area's private sector economy in six months.
Chris Williamson, Chief Business Economist at IHS Markit:
"The eurozone economy showed resilience to disruptions arising from the coronavirus outbreak in February, but dig deeper into the data and there are signs that problems lie ahead. The overall rate of expansion picked up slightly, largely on the back of rising domestic demand fuelling increased service sector activity, accompanied by signs of the manufacturing downturn easing. However, exports of both goods and services are now falling at an increased rate due to virus-related downturns in demand, and increasingly widespread delivery delays threaten future production. In the service sector, growing numbers of companies are reporting lost business due to the virus spread, notably in sectors such as hotels, travel, transport and tourism but also even in areas such as financial services."
"Growth of both output and demand consequently remains weak, and caution in relation to hiring means jobs growth likewise remained among the lowest recorded over the past five years. Business expectations have also dropped lower, largely in response to the growing virus threat. While the PMI data so far for the first quarter are signalling a 0.1-0.2% increase in GDP, there are clear downside risks and a likely weakening of the economy in March."
German Factory Orders surged 5.5 percent month-over-month in January 2020, easily beating market expectations of a 1.4 percent advance and reversing a 2.1 percent fall in December. This was the biggest rise in orders since July 2014. This is more evidence that before the Covid-19 shock, the global economy was starting to gear up as 2020 kicked off.
At 40.3 in February, the headline seasonally adjusted Caixin China General Purchasing Managers' Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, fell from 51.1 at the start of the year to signal a renewed decline in the health of the sector. Furthermore, it was the lowest PMI reading since the survey began in April 2004.
Dr. Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group:
"The Caixin China General Manufacturing PMI slid to 40.3 in February, weaker than 40.9 in November 2008 amid the global financial crisis. This month's gauge hit the lowest level since the survey launched in early 2004. The sharp decline was due to stagnant economic activity across the country disrupted by the pneumonia epidemic caused by a novel coronavirus. The supply and demand sides of the manufacturing sector were both weak. "
1) Both the subindexes for output and total new orders plummeted into contraction territory and hit their lowest levels on record. Supply chains came to a standstill as businesses extended the Lunar New Year holiday and multiple local governments implemented restrictions on transportation and the movement of people in efforts to control the epidemic. The gauge for new export orders remained in negative territory and slumped to the lowest point since January 2009.
2) There was a large backlog of previously accumulated orders due to stagnant supply chains. While both the subindexes for employment and suppliers' delivery times remained in negative territory and dropped to record lows, the gauge for backlogs of work remained in positive territory, to highlight the strongest rise since April 2005. Manufacturers were faced with great pressure to deliver orders with insufficient operational capacity amid the impact of the epidemic. While the gauge for stocks of purchased items fell to its lowest point since January 2009, the one for inventories of finished goods rebounded slightly, indicating that both the supply and demand sides were stagnant. Both gauges remained in contractionary territory.
3) Industrial product prices dropped slightly. While the measure for output prices fell into negative territory, the one for input costs remained in positive territory despite a small drop. Companies have been under pressure to cut prices in the face of declining demand. Pressure on costs of raw materials remained large, but it was no longer a major problem.
4) That said, business confidence continued to improve, with the gauge for future output expectations hitting a five-year high. This was due chiefly to more proactive macroeconomic policies and policymakers' support for small and midsize enterprises.
"China's manufacturing economy was impacted by the epidemic last month. The supply and demand sides both weakened, supply chains became stagnant, and there was a big backlog of previous orders. However, manufacturers were more confident. The economy will be able to see a significant rebound when the epidemic is gradually contained and companies accelerate the resumption of business amid more proactive fiscal and monetary policies."
Adjusted for seasonal factors, including Chinese New Year, the headline Caixin China Services PMI Index fell over 25 index points from 51.8 in January to 26.5 in February. This marked a sharp decline in business activity that was also the first recorded since the survey began over 14 years ago. The vast majority of panel members identified the outbreak of the coronavirus as the key driver of reduced activity, with firms facing extended company closures after the Chinese New Year and strict travel restrictions.
Dr. Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group:
"The Caixin China General Services Business Activity Index fell to 26.5 in February, about half the reading of the previous month, marking its first drop into contraction territory since the survey launched in November 2005. Stagnating consumption amid the coronavirus epidemic has had a great impact on the service sector."
1) The demand for services shrank sharply. Both the gauges for totally new business and new export business dropped to their lowest levels on record.
2) It was difficult for service providers to recruit workers, and backlogs of work climbed. The drop in the employment gauge was relatively small, but its February reading marked the lowest point on record. The measure for outstanding orders surged to a record high. Supply capacity across the service sector was insufficient amid restrictions on the movement of people.
3) The measure for input costs dropped at a steeper rate than that for prices companies charged customers, because of a sharp decline in supply capacity.
4) Business confidence also fell to a record low. Although policies have been introduced to provide tax and financing support for industries and small businesses heavily impacted by the epidemic, service companies were still concerned about uncertainties resulting from the epidemic.
"The Caixin China Composite Output Index dropped to 27.5 in February from 51.9 in the previous month. While the gauges for new orders, new export orders, and employment all weakened to their lowest levels on record, the gauge for backlogs of work rose to a record high. The decline in input costs was greater than that in output prices because upstream industries' supply capacity was less affected."
"The coronavirus epidemic has obviously impacted China's economy. It is necessary to pay attention to the divergence of business sentiment between the manufacturing and the service sectors. While recent supportive policies for manufacturing, small businesses and industries heavily affected by the epidemic have had a more obvious effect on the manufacturing sector, it is more difficult for service companies to make up their cash flow losses."
The seasonally adjusted headline IHS Markit Hong Kong SAR Purchasing Managers' Index plunged to 33.1 in February, down from 46.8 in January, signaling the sharpest deterioration of private sector conditions since the survey started over 21-and-a-half years ago. The average PMI reading so far (39.9) for the first quarter indicates that Hong Kong's private sector economy looks set for a deeper downturn during the opening quarter of 2020.
Bernard Aw, Principal Economist at IHS Markit:
"The latest PMI flashed red warning lights on the dire private sector conditions across Hong Kong SAR in February amid the coronavirus outbreak, with the headline index plunging to an unprecedented level since the survey started in July 1998."
"Measures taken in response to the Covid-19 situation and general fear of being infected saw business activity and new sales sinking at a record pace in an economy that has been beset earlier by political protests and US-China trade war tensions."
"Business confidence plummeted in the city, with a majority of firms anticipating lower future output amid expectations that the coronavirus situation will persist in coming months. Consequently, firms cut employment and purchasing activity sharply in preparation for challenging times."
"With the Hong Kong SAR economy shrinking 1.9% during 2019, the average PMI so far for the first quarter of 2020 points to a deepening recession, raising the urgency for policy support."
The headline Jibun Bank Japan Manufacturing Purchasing Managers' Index, a composite single-figure indicator of manufacturing performance, fell to 47.8 in February, down from 48.8 in January, its lowest mark since May 2016. Overall, the headline survey measure was indicative of a moderate but accelerated deterioration in manufacturing business conditions
Joe Hayes, Economist at IHS Markit:
"Near-term prospects for Japan's industrial sector appear very bleak, according to the February Manufacturing PMI report. Weakness was driven by the demand-side in a broad-based fashion. Consumer, intermediate and capital goods producers recorded faster declines in demand and overall order books fell at the sharpest rate in over seven years. This certainly cannot be wholly attributed to the COVID-19 outbreak, so it appears that Japan's manufacturing recession goes much deeper, but lower sales in China during the month add further woes to an already-fragile external environment."
"Demand-side weakness was exacerbated by shipment delays and delivery cancellations. Some panelists reported that they were unable to source key raw materials from suppliers in China. Existing buffer stocks helped to offset some of the shortfalls, but if supply chain disruptions carry on for an extended period then the risk to industrial output will be far greater. That said, the decline in manufacturing production was not as bad as some other countries in the Asia-Pacific region in February."
The seasonally adjusted Jibun Bank Japan Services PMI Index fell from 51.0 in January to 46.8 in February. This signaled a renewed contraction in services output, reversing the shallow recovery registered previously. Furthermore, the rate of decrease was the sharpest since April 2014, the month in which the sales tax increased to 8%.
Joe Hayes, Economist at IHS Markit:
"The February PMI report bodes ill for the Japanese economy and, barring an exceptional rebound in March, suggests that a technical recession is exceedingly likely following the fourth quarter's marked contraction in GDP. The initial impact of the COVID-19 outbreak appears to have hit service sector activity the hardest. Services companies in Japan have not recorded such a drop in output since April 2014 when the consumption tax hike to 8% took effect."
"New business fell sharply as tourism, a key source of demand, was squeezed. In some cases, firms reportedly closed their stores as incoming workloads were insufficient. Policymakers are powerless in offsetting the economic effects of coronavirus. Supply chains are likely to face bottlenecks as Chinese vendors face heavy backlogs while increasing cases of COVID-19 outside of China will do little to spur consumers to travel and go out to restaurants."
At 54.5 in February, the headline seasonally adjusted IHS Markit India Manufacturing PMI held close to January's near eight-year high of 55.3. This signaled another robust improvement in operating conditions across the sector. Manufacturing production increased at a similar pace to January's 91-month high, as firms reacted positively to new business gains and favorable market conditions. Growth was led by consumer goods makers, followed closely by intermediate goods producers
Pollyanna de Lima, Principal Economist at IHS Markit:
"Factories in India continued to benefit from strong order flows in February, from both the domestic and international markets. The pick-up in demand meant that companies were able to further lift production and input buying at historically-elevated rates."
"However, alarm bells are ringing for Indian goods producers as the COVID-19 outbreak poses threats to exports and supply chains. Businesses became less confident about the year-ahead outlook for output, in turn restricting hiring activity." "Meanwhile, price data continued to highlight a lack of inflationary pressure in the sector. Only modest increases in input costs and output charges were recorded in February, a trend that has been a key theme of the manufacturing PMI survey for over a year."
The seasonally adjusted IHS UK Markit/CIPS Purchasing Managers' Index rose to 51.7 in February, up from 50.0 in January, but below the earlier flash estimate of 51.9. The PMI posted above the 50.0 neutral level for the first time in 10 months.
Rob Dobson, Director at IHS Markit:
"The UK manufacturing sector remained in recovery mode in February, as reduced levels of political uncertainty following last year's general election translated into further growth of output and new orders. Supply-chain disruptions were emerging rapidly, however, as the COVID-19 outbreak led to a substantial lengthening of supplier lead times, raw material shortages, reduced inventories of inputs, rising input costs and reduced export orders from Asia and China in particular."
"The expansion of output was nonetheless the fastest since April 2019, as stronger demand from the domestic market led to the steepest increase in new work in 11 months. Business optimism also improved to a nine-month high. However, the upturn remains confined to the consumer and intermediate goods sectors, as the downturn at investment goods producers continued. This suggests that business confidence levels have yet to recover sufficiently to support a sustained rise in capital spending. With supply-chain headwinds rising, and trade negotiations with the EU start, it remains to be seen whether the recovery can stay on course during the coming months."
At 52.6 in February, up from 48.4 in January, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index registered above the 50.0 no-change value for the first time since April 2019. Moreover, the latest reading signaled that the overall rate of construction output growth was the fastest for 14 months.
Tim Moore, Economics Director at IHS Markit:
"February's survey data adds to signs that the UK construction sector has started to rebound after a downturn through the second half of last year. Growth of business activity was stronger than at any time since the end of 2018, supported by the fastest rise in new orders for just over four years. Some construction firms suggested that the recovery in output would have been even stronger had there not been disruptions on site from severe weather conditions in February."
"There were widespread reports that pent-up demand released since the general election had helped to boost workloads, especially in relation to house building and commercial construction projects. Civil engineering activity moved another step closer to stabilization in February. A number of survey respondents commented that contract awards from HS2 and other major transport projects had the potential to boost infrastructure work at their businesses in the year ahead."
"While construction order books have begun to recover in the opening part of 2020, the fly in the ointment is the uncertain impact of the coronavirus outbreak on UK economic growth prospects. A renewed slowdown could see domestic investment spending put back on hold and dampen the outlook for the UK construction sector."
At 51.8 in February, up from 50.6 in January, the seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers' Index registered above the 50.0 no-change value for the sixth consecutive month and pointed to the strongest overall improvement in business conditions since February 2019.
Tim Moore, Economics Associate Director at IHS Markit:
"February data suggested a modest improvement in new order growth across the Canadian manufacturing sector, helped by a rise in export sales for the first time in five months. The gradual rebound in workloads boosted production volumes and underpinned a slight rebound in job creation. Consumer goods remained the best-performing area of manufacturing, with robust output growth contrasting with sluggish trends in the intermediate and investment goods categories."
"Manufacturers had to contend with more widespread supply chain disruptions in February, with lead times for manufacturing inputs lengthening to the greatest extent for 12 months. Survey respondents cited a combination of rail transport delays and reduced availability of items sourced from suppliers in China, but there were only a small number of reports that supply chain difficulties had acted as a constraint on production schedules."
Earnings Observations
It's easy to forget, but the recent earnings season came in pretty strong versus expectations with more than 65% of reporting names beating earnings over the last three months and more than 62% beating sales, both stronger than the historical average. However, that is in the rear-view mirror. What looked to be the recovery in earnings we were assuming is one big question mark now.
As the stock market tries to regain its footing, what we are witnessing today is a complete reset of the corporate earnings picture going forward. If you're not sufficiently worried about market sentiment, imagine how bad things might get when analysts start pricing in what the equity market is pricing. However, the market has a way of figuring these situations out and pricing them in far before the individual investor "gets it".
Source: Bespoke
So far, forward estimated EPS have not fallen substantially. I do expect analysts to drastically undershoot what we could see in 2020. After all, they are also filled with plenty of human emotions.
The few companies that have issued profit warning do not seem to amount to the $4 trillion in market destruction. Then again no one said the market can't act irrationally. Any earnings projection is like a plate of jello, it is constantly swinging in either direction. We use whatever we can as a guidepost in assembling a strategy. As we move forward, the market will also turn its attention to what 2021 earnings will look like. So this picture is ever-evolving.
Right now with a market gripped in FEAR, the WORST case is always projected. Jumping to an immediate conclusion based on speculation isn't the way I would proceed.
There is another fact to consider. When we know that the Fed won't raise rates in any meaningful manner for what could be a VERY long time, PE multiples will rise, NOT fall. I believe the market "gets" that once they let go of the fear of the virus being with us forever.
The Political Scene
G7 Finance Ministers and Central Bank Governors met on March 3rd to discuss the global coronavirus situation.
"We reaffirm our commitment to using all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks ... G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system."
The G7 statement was meaningless and the market did not react.
Congress approved an $8 Billion Coronavirus Response Package that was signed by the President on Friday. The Senate Appropriations Committee's summary of the funding plan indicates that 85% of it will go to address coronavirus concerns domestically. The money is designated for coronavirus prevention, preparation and response efforts. The plan includes almost $7.8 billion in new funding to combat the spread of the virus at the local, state, national and international levels, according to details from the panel.
If the package includes common sense pills, then it can have a massive effect on the economy going forward. Unfortunately, I didn't see that mentioned in any of the published documentation.
Former Vice President Joe Biden won the first Presidential primary of his career after multiple decades of attempts at the White House. South Carolina's electorate, which skews older than the Democrats' national party and is one of the highest black percentages of any election in the country, delivered him a massive win after his campaign had been left for dead in the wake of New Hampshire and Nevada.
A late endorsement from Congressman Jim Clyburn was helpful, but the scale of the voting for Biden, especially among older voters, was too large to be explained by a single endorsement. South Bend, Indiana, Mayor Pete Buttigieg dropped out of the race on Sunday night after getting blown out in the state. Former health care executive Tom Steyer also dropped out.
The current frontrunner and winner of popular votes in the first three contests, Bernie Sanders, won delegates, but only 28% of the total; the rest went to Biden. As a result of the strong result for Biden, the stage for Super Tuesday was set as primarily a contest between Sanders and Biden.
Before Super Tuesday, the center and moderate wings of the Democratic Party consolidated around Joe Biden. In addition to former Presidential hopefuls Buttigieg and Klobuchar dropping out of the race, a fresh wave of endorsements came for the former VP including former Presidential and Texas Senate hopeful Beto O'Rourke. A host of other minor officials across the country also threw in with the former VP.
Moving along, Joe Biden is now the leader in delegates after huge wins on Super Tuesday on the East Coast and Midwest dealt a blow to Senator Bernie Sanders. Biden also won Texas narrowly. Sanders is not by any means eliminated from the race (and the comeback for Biden should illustrate how fast things can change), thanks to strong performances in very large states; California's final delegate allocation won't be known for a week thanks to early votes mailed as late as election day trickling in, but Sanders' large margins in the state weren't enough to offset the massive margins for Biden elsewhere.
Late voters broke overwhelmingly for Biden, with states that have little or no early vote (Virginia) performing huge for him and endorsements helping (Biden carried Minnesota after its Senator Klobuchar endorsed; he had no staff in the state). Assuming Biden's momentum continues, markets currently price him at 45% chances of beating the President in November. Notably, the President's odds have started to plateau and drift lower as the Democratic Primary has ramped up.
The Fed
The Federal Reserve surprised the markets by announcing an emergency rate cut. Moving the Fed funds rate to a range of 1%-1.25%.
"The coronavirus poses evolving risks to economic activity. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy."
Fed's Beige Book reported the economy "expanded at a modest to moderate rate," as analysts expected. The report was compiled by the Richmond Fed with data collected on or before February 24. According to the Fed, "outlooks for the near-term were mostly for modest growth with the coronavirus and the upcoming presidential election cited as potential risks." The coronavirus was not mentioned until the fifth sentence, but a word count showed 57 uses of coronavirus or COVID-19. There were indications the virus was negatively impacting travel and tourism. Manufacturing expanded in most districts.
Some supply chain disruptions were noted, but producers "feared further disruptions in the coming weeks." The service sector showed "mild to moderate" growth. Residential home sales picked up. Employment increased at a "slight to moderate pace overall, with hiring constrained by a tight labor market." There was modest growth in selling prices in most districts, as well as in nonlabor input prices. Weaker demand from China due to COVID-19 generally weighed on oil and gas prices. Meanwhile, retail prices rose in much of the nation, though some retailers had lower costs due to improved trade conditions.
The report was pretty much as expected.
The 10-year Treasury blew the bottom out of the trading range again over the coronavirus fears. The 10-year note yield was battered down closing at a record low of 0.74%.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
Source: U.S. Dept. Of The Treasury
The 2-10 spread was 30 basis points at the start of 2020; it stands at 25 basis points today.
The fixed income market has become a speculative playground. When investors enter, the sign at the door says "Welcome FEAR is everywhere". Of course, the immediate conclusion becomes the bond market is signaling a recession.
I have been on the other side of those messages and observations for more than 5+ years now and continue to stay right where I am.
Sentiment
Another sentiment survey of newsletter writers from Investors Intelligence, on the other hand, leans more distinctively Bearish. This survey's reading on bullish sentiment fell to 41.7% in the latest week which is the lowest reading since January of last year. Granted, at that time bullish sentiment reached much lower levels bottoming at 29.9%.
Source: Bespoke
Meanwhile, Bearish sentiment is at its highest level since March of last year. Like bullish sentiment, while it is at one of its highest levels in some time, it also topped out at much higher levels just over a year ago. Bearish sentiment peaked at 34.6% in the first week of January of 2019, 14.2 percentage points higher than current levels.
Source: Bespoke
Crude Oil
OPEC announced a 1.5 million barrel per day cut in crude output, contingent on one-third of the production reduction coming from non-OPEC allies of the cartel including Russia. However, it appears that the deal won't happen as Russia decided not to agree. Regardless of Russia's decision, a cut of 1.5mm BPD may not be anywhere close to enough of an output cut to make a difference.
Domestic production rose to another record high of 13.1 mm bbl/day while imports came in at a five-year low. Although the U.S. imported less oil, exports and net exports are at their second strongest levels on record.
The Weekly inventory report showed U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 800 thousand barrels from the previous week. At 444.1 million barrels, U.S. crude oil inventories are about 4% below the five-year average for this time of year.
Total motor gasoline inventories decreased by 4.3 million barrels last week and are about 2% above the five-year average for this time of year.
Given the fear of a global recession and the OPEC debacle, WTI sold off hard. Price settled at $41.37 on Friday. That was a loss of $3.39 from last week. Energy stocks dropped to 11-year lows.
The Technical Picture
Volatility continues. Violent activity is also associated with a market trying to establish a bottom. This week's trading activity continues to confirm that.
Chart courtesy of FreeStockCharts.com
The technical rally from the lows set on February 28th was stopped dead in its tracks, and then reversed to close below the 200-day moving average. While the consensus view has the S&P falling sharply from these levels, the next few days will determine if the interim lows set in this correction will hold. In the interim, a trading range between S&P 2,855 and 3,136 has been established.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
A reality check
The yield on the 10-Year Treasury dipped below 1% this week for the first time as the Fed cut rates by 50 basis points.
Since the mid-2000s, the spread between the S&P's dividend yield and the 10-year yield has only moved above one on one other occasion, and that was near the depths of the Financial Crisis in December 2008.
With a 0.74% 10-year yield and the yield on DJIA at 2.49% and the S&P 500 at 2.05%, the spread is now 1.7% and 1.3% respectively. For what it is worth, I simply do not see a financial crisis looming due to this virus.
It should be very apparent that the REAL issue with this virus event is PERCEPTION. All across the globe investors are using that mindset in defining their strategy now. However, it is not just an investor's reaction that is of concern.
Right now the consensus view is extremely negative, producing FEAR that can have a destructive impact on the economy. Ironically, we have the possibility of that occurring without the virus causing any REAL serious health problems for populations all around the globe.
The "FEAR" component of the current market action gives me pause. It is not that I haven't experienced fear in the markets before, it is because this fear is continually being supported by incessant negative rhetoric. Every single case, every single death is exacerbated. Any positive developments are being dismissed. This is not unusual in any situation driven that is driven by EMOTION.
Given social media today and the overabundance of news at our fingertips, I do not see this stopping anytime soon. Far too many moving parts and agendas to keep that mindset in place. This keeps the markets on edge until the majority sees the event played down or going away.
I heard an interesting conversation that showcases what I am referring to. When asked what was causing the swift decline in the 10-year from 1% to 0.89% in a matter of a few hours, a trader in the fixed income market replied, just take a look at the "news on Corona". That continued barrage of news then took the 10-year down to 0.70% the next day.
As stated in the opening paragraphs, fear and emotion trump ANY other view presented, including facts. The stock market action the past few trading sessions tells us investors are filled with emotion. Most of those same people have already made up their minds regarding the coronavirus issue. Given those two circumstances, it is a fool's errand to enter into a debate over this health scare.
Based on the facts here is what I know. The S&P posted 13 new highs in the first 33 trading days of the year. That comes after 34 new highs and a 30% gain for the S&P in 2019, followed by another 4+% tacked on in early 2020. The last 10% correction in the S&P was 16 months ago. From that low, the S&P rallied 44%. All of that occurred with the largest pullback being 7%.
To date, this correction in the senior index has been 12.7%, and on Friday finished another volatile week of trading down near those lows off 12.2% from the highs.
Facts tell us until proven otherwise, this time frame should be viewed as a correction in a BULL market trend. Emotion and rank speculation tells investors this is something else. The issue that investors face, emotion can take this to a further extreme that does push the S&P into what some already predict to be a cyclical BEAR market. So these are difficult times to make decisions.
Investors are being told to project and assume that this time will be different. In contrast, a fact-based strategy has reaped the lion's share of the gains in this bull market. I harken back to December 2018, when panic was in the air, and the vast majority didn't want to look at the facts. What happened next had a HUGE positive impact on the investors that did indeed use the facts presented.
Until shown otherwise I remain with the notion that this time will not be different. 
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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This article was written by
Fear & Greed Trader is an independent financial adviser and professional investor with 35 years of experience in all market conditions. His strategies focus on achieving positive returns and preserving capital during bear and bull markets and he has a documented track record of calling the equity market correctly for the 10+ years.
He is the leader of the investing group The Savvy Investor where he focuses on sharing advice to help investors avoid the pitfalls that wreak havoc on a portfolio during bear markets. Features of the group include: Macro updates 7 days a week, ETF selections, covered call writing strategies, and live chat 24/7. Learn More.
Analyst’s Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
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Comments (585)
Kit
For the virus
2. What is "hedge bulldogging" ?
3. What will you do if the low was seen today?I'm now at about 70% cash (I sold mostly when Russell 2000 was in the 1575 - 1620 range on 2/24 & 2/25 as posted here) and have some ideas about what to do but I don't have the stomach to buy anything now.
ANSWER: When the market is in panic mode.Yesterday, I was a buyer of stocks. I'll probably buy more today. I'm legging in very incrementally, knowing there's likely to be even better prices ahead. But I'm also keeping in mind that the market can erase losses very quickly once uncertainties are clarified.I wish we had a President who inspired more confidence. That said, I have little faith my own political party would do any better under the circumstances. These are tough times.Good luck to all.--TBC