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Volatility Induced Stress Has Taken Over the Stock Market

March 09, 2020
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Monday Morning QB - Market Observations:

  • Volatility in the Stock Market Continues Despite Closing the Week Out to the Positive Side
  • Investors Rush to the Safety of Government Bonds Forcing the 10 Year Treasury Yield to an All-Time Low
  • Virus Fears are Taking Control of Global Economic Outlook
  • Crude Oil Prices Plummet Over Darkening Global Economic Forecasts and the Split from OPEC and OPEC+ Nations
  • Federal Reserve Enacts an Emergency ½% Rate Cut
  • February Jobs Report was a Blowout Number…Not that Anyone Seemed to Care

Monday Morning QB - Market Performance:

Volatile doesn't seem like the right adjective to describe the current stock market. 1,000+ point swings are starting to feel like the norm.

Stocks did manage, however, to eke out a small gain last week once the dust settled.

The large-cap benchmarks and the technology-heavy NASDAQ Composite recorded gains for the week, while the smaller-cap indexes ended the week modestly lower.

The Dow Jones Industrial Average added 455 points last week, ending the week at 25,864— a gain of 1.8%.

The NASDAQ Composite finished up 0.1%, while the large-cap S&P 500 added 0.6%. The mid-cap S&P 400 index finished down -0.9%, followed by the small-cap Russell 2000, which finished down -1.8%.

Stock Market Volatility – The Roller Coaster Ride is Wearing Investors Out

I can't speak for everyone, but I love a good roller coaster ride, except when it's my portfolio doing the riding.

The worst part of the roller coaster ride is all the drama, the ups and downs, the twists and turns, only to end in the same place you started.

Roller coaster is an apt description for last week's market action (See Chart Below).

The week began with a nice rally giving everyone some hope that maybe the news had created an oversold panicked environment.

Tuesday gave us the surprise Federal Reserve announcement meant to inject a sense of calm. Instead, the opposite happened, as many questioned the effectiveness of a cut given that the current problem is not economic, but viral.

Wednesday brought a relief rally, the credit going to Joe Biden's Super Tuesday showing in the polls. The jubilation did not last long as the market whipsaw continued.

Thursday and Friday saw the return of fear and panic as the focus returned to impacts of the coronavirus on the global economy.

When all the dust settled last week, the S&P 500 index closed the week in correction territory, off more than 12% from the February 19th high and down 8% year-to-date. (See chart above.)

Worst of all, I think the stock market roller coaster has left many of us emotionally exhausted.

Unfortunately, our exhaustion will not find rest today, as we will start the week with another 1,000 point drop as indicated by the futures leading into the start of the week.

The Federal Reserve Response

The Federal Reserve's "Beige Book," a collection of anecdotal information on current economic conditions from each of its member banks, showed that the coronavirus was starting to have an impact on the U.S. economy.

To the surprise of no one, the Federal Reserve expressed concern for the travel and tourism industries. Their other main issue centers around the effect of the disruption caused by the virus on manufacturers regarding supply chain disruption.

One of the Fed's biggest stated worries was, even without the coronavirus, growth appeared to be slowing down since the start of the year.

Economic activity was described as "modest to moderate" in most Fed districts. Two regional Fed districts (St. Louis and Kansas City) reported no growth.

Slowing business activity along with the potential coronavirus impact led the Fed to an emergency rate cut response. The Fed cut its benchmark rate by a half-point on Tuesday to a range of 1%-1.25%.

The Federal Reserve hinted that more rate cuts were possible and pushed our government officials to work on a fiscal stimulus plan.

Can we trust Congress to do something right and bipartisan?

Good Economic Data Yields to Virus Concerns

The monthly Non-Farm Payroll (NFP) report showed the U.S. economy created a surprisingly strong 273,000 new jobs in February. However, the data was compiled shortly before the coronavirus contagion spread worldwide.

The million-dollar question is how long before the coronavirus forces down company profits leading to payroll cuts? Economists are watching closely to see when layoffs start to rise.

Manufacturers reported slowing business as supply bottlenecks tied to the coronavirus limited their ability to get needed parts, a survey of executives showed.

The Institute for Supply Management (ISM) reported its manufacturing index declined 0.8% point to 50.1% in February. Readings over 50% indicate expansion. However, the negative trend is very concerning.

In the report, the ISM's new orders index slipped 2.2 points to 49.8% as new orders for manufactured goods fell into contraction. Production was barely positive.

Conversely, in  February the much larger services side of the economy expanded at its fastest pace in more than a year. How long will the U.S. consumer continue to show up, given the expanding fears over the coronavirus?

The viral outbreak has already hurt tourism, transportation, and travel-related businesses and other sectors might soon feel the ill effects.

While 16 of the 18 industries tracked by ISM said their companies were expanding, that optimism appears to be fading. Anthony Nieves, chairman of the index committee, stated, "Most respondents are concerned about the coronavirus and its supply chain impact."

Portfolio Impact from the Coronavirus

Starting on January 31st, we began reducing stock market exposure in our portfolios. As more of our indicators showed signs of strain, we responded by continuing to reduce stock market exposure.

Depending on risk tolerance and chosen portfolio, our clients are somewhere between "out of the stock market" to a maximum exposure of around 33%.

Volatility is uncomfortable for everyone. Please do not hesitate to call the office for information, comfort, or anything you need during these trying times.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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