foxex: Sliding

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Stocks fall for fourth day in a row. Europe opts for stimulus.

Markets Close

Dow
25,473.23 -0.78%

S&P
2,748.93 -0.81%

Nasdaq
7,421.46 -1.13%

VIX
16.59 +5.40%

INV Anxiety Index
98.51 Low

US 10-Yr Yield
2.636 -2.08%

Credits: Kevork Djansezian / Stringer

Stocks Slide as Volatility Returns

U.S. markets fell for the fourth straight day as a vacuum of news surrounding the trade talks is providing very little for investors to get excited about. The Volatility Index (VIX) has jumped significantly over the last two days after having been very quiet over the past two months.

We had gone over two months without a drawdown of more than 1.5% from the most recent high until today. The S&P 500 has now fallen 2.1% from last week's high. Animal Spirits are awakening.

Still, the major U.S. indexes are up sharply for the year, with the S&P 500 and Nasdaq up 10% since the beginning of 2019, while the DJIA has posted a 9% gain. We are in that 'in-between', stage of the business calendar when just a few companies are reporting quarterly results, proxy season has yet to begin, annual meetings are still a few months away and there is not a lot of activity on the IPO front. It's the grind of late winter, and like the season, it will change soon.

Europe's Surprise Stimulus

In an unexpected move, the European Central Bank announced a fiscal stimulus plan to ease monetary policy in response to a global economic slowdown. The ECB said it would hold interest rates at their current levels through 2019, and allow banks to make cheap long-term loans to generate liquidity. (See the impact on the euro in James' chart of the day, below)

Europe will face various headwinds in the coming months. Brexit is at the top of the list as the March 29th deadline approaches for the U.K. to leave the EU. That process has been anything but smooth. Countries like Italy and Spain are beset with relatively high unemployment and low growth. Germany, which was the strongest economy on the continent, has flatlined, and France is grappling with a wave of populism and anti-government sentiment that has paralyzed its leadership.

The Organization for Economic Cooperation and Development cut its forecast for growth in the Eurozone from 1.8% to 1.1%, back in November. If you zoom into this chart from the OECD, you'll see Europe's slowdown along with a host of other countries also experiencing economic weakness.

Why it Matters

Europe has its challenges with Brexit topping the list. But, aside from Brexit, which is expected to shave growth from the UK and other countries in the Eurozone, slowing growth is a major problem that is bringing economic and social issues with it. We have seen the orange vest protests in France, the rise of populist movements in Poland and Austria, and high unemployment in the southern countries.

Extreme monetary policy measures like the one taken today by the ECB are usually reserved for times of intense crisis and economic peril. Draghi said Europe is not there yet, so today's move to curb interest rate hikes and spur lending by banks is a bit of a preemptive surprise. The ECB may be trying to head off a full-blown crisis, but it should be prepared to take even more extreme measures if things get worse. We are 21 days away from the Brexit deadline.

Americans' Pockets are Lighter

That massive stock correction we experienced last Fall has had a significant impact on household net worth, according to the Federal Reserve. About $3.4 trillion worth of impact, to be exact. The Fed reported a drop in U.S. Household Net Worth of 3.4%, as the overall measure, which includes corporate equity (ownership value of stocks) real estate assets and 'other', like cash and other assets.

The market drop in November and December of 2018 knocked $4.6 trillion out of the equity market, and as we have reported, many investors sold stock and hid in cash. Many missed the 18% rebound of January and February.

Why it Matters

Household net worth is just one of the data points the Fed looks at when making monetary policy decisions. It feeds consumer sentiment spending, which feeds the overall economy. While the Fed's report captures household net worth in the past (the past quarter), it does provide a valuable reading on the health of the overall economy and its citizens. While net worth may have fallen given the decline in the stock market, the jobs market remains strong and inflation - the other main concern for the Fed - is relatively in check.

The most important takeaway from the Fed's report today is just how much weight the stock market has on the overall net worth of American households, even though the majority of Americans are still not invested in the stock market. That means that the concentration of wealth among those that are invested is profound. Look at the drop on the far right of the chart, courtesy of the Federal Reserve.

Chart of the Day: Euro Plunges to New Lows on ECB Warnings

The euro plummeted to a new 20-month low against the U.S. dollar on Thursday after the European Central Bank (ECB) cut its 2019 economic growth forecast drastically from 1.7% back in December to a new estimate of only 1.1% GDP growth. Aside from this surprise announcement, the ECB kept the eurozone's record-low interest rates unchanged, as expected, but also postponed the expectation of a rate hike to at least 2020. Previously, the central bank had indicated that there was potential for a hike after this summer. In addition, the ECB's statement announced a new program to stimulate bank lending amid declining economic sentiment - a program that was intended for economic crises.

ECB President Mario Draghi stated in the subsequent press conference that "the risks surrounding the euro area growth outlook are still tilted to the downside." Draghi also said, "the persistence of uncertainties related to geopolitical factors, the threat of protectionism, and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment."

This surprising combination of a much lower growth outlook than expected, delayed monetary policy normalization, and even more central bank stimulus, placed heavy pressure on the already-beleaguered euro. Not since June 2017 has the eurozone's shared currency fallen to such depths against the dollar, dropping below the lows of November. Of course, the ECB's announcement also weighed sharply on global equity markets, but the negative effect on the euro was even more heavily pronounced.

Where does the euro go from here? With the EUR/USD having broken down below key support, and fundamentals looking increasingly pessimistic, the currency pair could continue to fall at least towards the 1.1000 level. This could be accelerated even further if the U.S. dollar continues to strengthen to new highs. A major economic release on the horizon that will drive the dollar's movement will be Friday's U.S. jobs report.