(Thursday Market Open) For those investors hoping to wake up to a change of pace from the fierce selling on Wall Street, Thursday morning was a rude awakening.
Nothing happened overnight to soothe investors. In fact, you could argue things seem even more grim this morning than they did after the Dow Jones Industrial Average ($DJI) slid into bear market territory yesterday.
It’s not just the NBA’s suspension of the basketball season, the ban on travel to the U.S. from many European countries, or the news that the NCAA will play its tournament with no fans present. It’s also confusion about what the best course of action might be for the government to take.
The travel ban and so many big events closing or being limited in scope seem to have ratcheted up worries about a recession. While ripple effects, such as fewer hotdogs and T-shirts sold at games, could help tip the economy in that direction, it’s worth remembering that recessions are part of the business cycle.
A speech last night by President Trump apparently didn’t offer investors what they had hoped for, judging by the response of the futures market. $DJI futures plunged 900 points soon after the speech ended. More recently, futures on all three of the main U.S. indices were down more than 5%, which is their limit-down threshold.
A Bear Roars
Trump’s speech came after the $DJI closed down more than 20% from its recent all-time high, which by the classic definition puts it in bear territory. The S&P 500 Index (SPX) wasn’t quite in bear territory yet–having closed down 19% from its high and 4.9% on the day–but futures markets this morning point to a crossing of the bear threshold in SPX as well.
Yesterday was a crazy day in every sense, but not the kind of crazy investors want to see. It started with the Bank of England lowering rates and the market selling off. Then stocks seemed to find some support. However, when the World Health Organization declared the coronavirus a pandemic, that led to a bigger sell-off.
It might be worth asking the question of why that announcement sparked such fierce selling. Arguably, we all knew that things were bad and likely to get worse in far flung places domestically and abroad. Perhaps it’s psychologically jarring to see an epidemic upgraded to a pandemic, but the writing has been on the wall for some time now.
What’s Your Time Horizon?
As we’ve discussed, volatility is likely to stay elevated. The Cboe Volatility Index (VIX) begins the day above 60 for the first time since early 2009, as markets were dealing with the global financial crisis. But even then–as will all volatile periods in the past–markets eventually settled down and found their footing.
In the meantime, sure, it’s hard to watch, no doubt. If you’re a long-term investor, you might want to keep thinking long-term and not focus too much on the daily ups and downs. If you have years of investing ahead, this could someday look like a blip. That’s how it’s been with corrections, historically. It’s worth keeping in mind, however, that the past doesn’t guarantee future results.
It’s harder if you’re close to retirement or already in retirement. While no one says things can’t get worse, the thing to keep in mind is that most economists don’t seem to be expecting too much long-term damage to the economy. Even if we see a recession–and that’s not a sure thing–remember that recessions are a natural part of the economic cycle. And while there’s no guarantee about the future, the economy and the market in the past have always come back even from the worst ones. Many economists are now saying if a recession happens, it might be mild.
If fiscal stimulus is on the way, it seems to be taking longer to show up than some investors had hoped. Some articles suggested the Trump administration might cut the payroll tax to zero or extend sick leave to all employees, but investors didn’t get such an announcement during trading hours yesterday.
It’s possible–maybe even likely–that Congress and the president could ultimately choose specific industries like airlines, cruise lines, and hospitality and try to help them through this crisis. This could mean some sort of bailouts. If no action comes soon, or if Congress and the White House can’t agree what to do and start squabbling, it could mean more pain for the transports and other sectors.
Dow Jones Industrial Average Futures
CHART OF THE DAY: DOW FUTURES CONTINUE SLIDING. The Dow Jones Industrial Average Futures (/YM-candlestick) slumped even more ahead of today’s open. /YM is now trading almost 25% below its all-time high from February. Data source: CME Group . Chart source: The thinkorswim(R) platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Inflation Situation OK as of February: With all the worries about COVID-19, investors might have been paying more attention to the $DJI entering a bear market than to economic data out Wednesday. But it’s the underlying data about the U.S. economy, which haven’t been that bad, that might prove to be the best cure for what ails the market. Consumer prices in February, as measured by the core consumer price index, rose an as-expected 0.2%, putting yearly core inflation at 2.4%. That’s an increase from January’s annual rate of 2.3% and is arguably a fairly healthy rate of inflation. After all, inflation as measured by the Fed’s preferred inflation gauge–the core personal consumption expenditures price index–has been stubbornly below the Fed’s 2% target. It’s worth keeping in mind that the latest data was from February–a month that wasn’t marked by as much domestic fallout from the virus as March has been. Still, worry was ratcheting up toward the end of the month; yet the headline CPI number increased by 0.1% when a flat reading had been expected.
But Moves in Oil Disinflationary: One of the biggest disinflationary factors at work now is the drop in oil prices. That’s been painful for producers, but it could end up being a tailwind for consumers at the pump. Of course, the question remains as to whether demand will also slump if there is a widespread decrease in travel as people elect–or are encouraged–to stay home. All of that, however, might not affect the inflationary landscape too much, at least from an energy price standpoint, because core inflation figures strip out volatile energy prices to give a clearer picture of inflationary trends. The question remains about whether March’s core inflation data will show any sort of a marked drop in non-energy sector related activity due to economic damage from the coronavirus
Will Optimism Waver? A survey of small businesses in February showed that owners continued to remain optimistic. The National Federation of Independent Business’s (NFIB) optimism index moved up 0.2 points to 104.5 in February, a print that was among the top 10% in the survey’s 46-year history. However, most of the survey responses were gathered before the recent escalation of the coronavirus outbreak and the Fed’s rate cut. “While business is good, the coronavirus outbreak remains the big unknown,” the NFIB said. “February was another historically strong month for the small business economy, but going forward, the economic outlook is less clear. The current impact on small businesses is limited, but as news breaks with more cases in more areas across the country, uncertainty will become a bigger challenge to small businesses.”
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