foxex: Free Falling

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. US markets tumble into correction territory

2. The 10 and 30-year US Treasury yields hit record lows

3. Goldman Sachs cuts profit forecast for the entire market

4. Bank of America predicts massive hit to global growth

Markets Closed

Dow
25,766.64
−1,190.95 (-4.42%)

S&P
2,978.76
−137.63 (-4.42%)

Nasdaq
8,566.48
−414.29 (-4.61%)

VIX
39.16
+11.60 (+42.09%)

Bitcoin
$8796.14
−$24.38 (-0.12%)

US 10-Yr Yield
1.299
−0.011 (-0.84%)

Markets Today

U.S. markets were in free fall today and the selling gathered momentum into the close, as California announced that it was monitoring 8,400 people for potential coronavirus infections. The DJIA was down 4.4% or 1190 points, its biggest one-day point decline in history. Keep in mind, it's the percentage, not the points, that matters. The S&P 500 and the Nasdaq also fell 4.4% and 4.6%, respectively. Both the Dow and the S&P 500 had their worst daily percentage loss since February 2018 while the Nasdaq posted its biggest one-day loss since August 2011. All three major indexes entered what is known as a "correction", a term meaning a 10% drop from recent highs. Let's not forget, those recent record highs were just two weeks ago, but the uncertainty around the continuing spread of the coronavirus has put the fear into investors' psyches, and they are bailing out of stocks as fast as they can.

The yield on the 10-year and the 30-year U.S Treasurys hit record lows as they have become the safe haven of choice for many investors. Oil prices slid another 5%, deeper into bear market territory, falling to their lowest levels in more than a year. The CBOE Volatility Index (VIX), commonly referred to as the "fear index", rose by 42.1% today.

How deep and how long this correction will be is also a great unknown, but here is some perspective from the most recent U.S. stock market corrections and bear markets since 1970.

Headlines:

Bed, Bath & Beyond (BBBY) announced it is cutting about 500 jobs, or 10% of its corporate workforce, as part of a larger restructuring plan in a bid to trim expenses. The company has roughly 55,000 to 60,000 employees overall, depending on the season, around 3,000 of whom work at its corporate headquarters in New Jersey.
U.K. Prime Minister Boris Johnson told the European Union he'll walk away from the negotiating table if he doesn't think there is enough progress towards a deal by June. Johnson's government is demanding complete access to the EU's markets without any requirement to keep U.K. regulations aligned with those of the EU. The EU wants some regulatory alignment and also a role for the European Court of Justice to deal with disputes. If no deal is reached, it will mean substantial trade barriers would go into effect.
Nearly half of U.S. companies doing business in China said they expect revenue to decrease this year if business can't return to normal by the end of April, according to a new survey by the American Chamber of Commerce in China.
Facebook (FB) announced that it was cancelling its annual developers conference due to concerns over the coronavirus. The F8 developer conference was scheduled for May 5 and 6.
Alphabet (GOOGL) and Microsoft (MSFT) are moving some production, including of the Pixel smartphone, out of China and into Vietnam and Thailand because of the coronavirus outbreak.
Food delivery company, DoorDash, announced it had filed for an IPO. The documents are not currently available to the public, but the IPO could happen as soon as late spring. Doordash was valued at about $12.6 billion at a funding round last year.
Blackstone (BX) agreed to buy a student housing company from Goldman Sachs (GS) for £4.7 billion, or $6 billion, in Britain's biggest-ever private real estate deal.
Starbucks (SBUX) CEO, Kevin Johnson, said today that 85% of stores in China are now open again. Starbucks has nearly 4,300 stores in China and initially closed more than half its stores last month.
Walmart (WMT) is developing a paid membership program to challenge Amazon Prime, which has become the default online shopping option for millions around the globe. Walmart+ will expand on the retailer's existing grocery-delivery subscription service, which it introduced last year.

Profits Erased

Goldman Sachs, which is typically one of the more bullish of the Wall Street investment banks, has made a very bearish call on profit growth for the S&P 500 for 2020. In fact, the bank says that if COVID-19 (coronavirus), continues to spread, it could wipe out all aggregate profit growth for the S&P 500 in 2020. In a note to clients this morning, chief strategist David Kostin wrote, "Our reduced forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, supply chain disruption, a slowdown in US economic activity, and elevated uncertainty."

Kostin and his team say they expect profit growth to tick up to 6% in 2021, but that seems so far away with many unknowns between here and there.

chart courtesy BAC Research

chart courtesy Bloomberg BofA Research

Slowest Global Growth Since 2008

It's not just profit growth that will be stunted in 2020. Bank of America's research team lowered its forecast for global GDP growth to 2.8% from 3.3%. This would be the first year of sub-3% global growth since 2009, and those of us who remember 2009 still shudder when we think of it.

The Bank's research team pins much of the slowdown on China and its neighbors, which were among the fastest growing countries in a decelerating global economy. But the coronavirus outbreak has caused all kinds of spillover effects that will hinder growth this year.

Chief economist Ethan Harris wrote, "Extended disruptions in China should hurt global supply chains. Weak tourist flows will be another headwind for Asia. And limited outbreaks, similar to the one in Italy, are possible in many countries, leading to more quarantines and weighing on confidence."

So no profit growth and the weakest economic growth since the financial crisis do not make the stock market very appealing right now in any country. This may pass, but no one knows when, or what it will leave in its wake.

Be cautious.

More News:

How Coronavirus Will Impact U.S. Equities

Get Ready for the Big Bounce

Energy Funds Plunge to 10-Year Lows

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(chart courtesy YCHARTS)

Resideo Technologies, maker of smart home and home security products, jumped more than 20% after both earnings and revenue were higher than expected. Ecommerce site, Etsy, also rose today after reporting higher-than-expected earnings, accompanied by an upgrade from "perform" to "outperform" from Oppenheimer analyst Jason Helfstein.

Cloud computing software firm, Nutanix, fell by nearly 30% after giving lower-than-expected guidance due to "the anticipated impact of the coronavirus." Energy companies continued to fall as oil and gas prices were pushed further down due to lower expected demand caused by the coronavirus. Continental Resources, Chesapeake Energy, and Equitrans Midstream were the hardest hit.

Word of the Day

Correction

In investing, a correction is a decline of 10% or more in the price of a security from its most recent peak. Corrections can happen to individual assets, like an individual stock or bond, or to an index measuring a group of assets.

China Photos / Stringer

Today in History

February 27, 2007
Today in 2007, the Shanghai Composite Index dropped by nearly 9%, which was, at the time, its biggest one-day drop since 1997. The S&P 500 in America dropped 3.5%, and the Dow Jones Industrial Average and Nasdaq Composite dropped similar amounts. The Shanghai Composite closed at 2,771.79, but it would recoup its losses and then some as it continued to climb until October, when it hit its all-time intraday high of 6,124 points. From there it, like the rest of the world's markets during the 2007-2008 financial crisis, dropped precipitously. However, unlike U.S. markets, the Shanghai Composite has not yet surpassed its pre-crisis high.

Source: https://www.nytimes.com/2007/02/28/business/28stox.web.html and
https://www.reuters.com/article/us-china-markets-intervention-timeline/timeline-the-rise-and-fall-of-chinas-stock-market-idUSSHA7419720080617