foxex: Bear Territory

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. The DJIA tumbles into bear territory as WHO proclaims pandemic

2. Goldman calls the end of the run - predicts 10% further drop in S&P

3. Individual investors remain undaunted and buy stocks

Markets Closed

Dow
23,553.22
−1,464.94 (-5.86%)

S&P
2,741.38
−140.85 (-4.89%)

Nasdaq
7,952.05
−392.20 (-4.70%)

VIX
53.9
+6.60 (+13.95%)

Bitcoin
$7,857.39
−$119.14 (-1.49%)

US 10-Yr Yield
0.82
+0.072 (+9.63%)

Markets Today

We've been smelling it for weeks, but the bear finally arrived today as the 30-stock Dow Jones Industrial Average (DJIA) tumbled 5.86%, down over 20% from its recent highs, as the World Health Organization announced that the deadly coronavirus is a global pandemic. That didn't necessarily cause the fall, but it's the latest development in what has become a global health and economic crisis. The S&P 500 and the Nasdaq are on the brink of bear territory, as well.

This despite emergency efforts by central banks and governments around the world who have been lobbing fiscal and monetary life preservers to save their economies and markets. Today, the Bank of England cut its benchmark rate by 50 basis points to 0.25%. The Federal Reserve also increased the amount of money it is providing to banks through overnight repo lending to $175 billion. The ECB meets tomorrow on interest rates, and it is likely to lower them for the Eurozone. Countries like Italy, which has been immobilized due to the virus, and Germany, which was already battling sluggish growth, are at risk of falling into a recession, if they aren't already in one.

We've been expecting markets to meet the bear for quite some time now. Since it has been many years since the last official bear market, many investors are meeting it for the first time. It's time for situational awareness and education.

Let's do this together.

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Headlines:

The White House is asking Silicon Valley for help to combat the coronavirus, track its spread, and stop misinformation. Members of the Trump administration are meeting today with Facebook, Google, IBM, Microsoft, and other major tech companies.
No fans will be attending the "First Four" NCAA games, as well as the first two rounds of the March Madness tournament. They are taking place in Ohio, where the governor has banned attendance at indoor sporting events due to the Coronavirus.
The U.S. budget deficit was a record $235.3 billion in February - even before the government enacted fiscal measures to ease the economic impact of coronavirus. The deficit reflected $423.3 billion in outlays and $188 billion in revenue, according to Treasury Department data released Wednesday.

The Mortgage Bankers Association's refinance index surged 78.6% to 6,418.9 in the week ended March 6. A report Wednesday also showed the contract rate on a 30-year fixed loan fell to match a record low of 3.47%.
Boeing (BA) is planning to draw on the full amount of a $13.825 billion line of credit as early as Friday. This comes as the plane maker grapples with worldwide travel disruptions from the coronavirus, according to Bloomberg.
U.S. footwear imports from China just had their worst January in more than a decade, according to the Footwear Distributors and Retailers of America. The 15.7% drop was also the worst year-over-year decline in four years. 70% of the footwear sold in the U.S. is made in China.

Saudi Arabia will raise its oil-production to 13 million barrels per day (bpd). State-owned firm Saudi Aramco has already increased output to 12 million bpd from 9.7 million bpd after OPEC talks with Russia failed.
Adidas says the coronavirus will hit Q1 sales in greater China by up to $1.14 billion. Operating profit is expected to decline by between $400 million and $500 million.
The U.S. Treasury is likely to push back the tax filing deadline, according to The Wall Street Journal. The decision is not yet final and details, such as who would be eligible, are still being worked out.
The Financial Industry Regulatory Authority (FINRA) has begun releasing weekly, aggregate data on the trading volume of U.S. Treasurys. Total trading volume was $5.7 trillion for the week of March 6.
109,000 Western Union (WU) customers have begun receiving refunds worth $153 million. As part of the company's settlement with the Federal Trade Commission (FTC), it will pay a total $586 million. The affected customers lost money to fraudsters and Western Union agents using the money transfer system.
Tesla (TSLA) is looking at locations in Nashville, and a few other places, to build a new Gigafactory, according to TechCrunch. The factory will produce its all-electric Cybertruck and Model Y crossover. Other companies producing electric vehicles in Tennessee include Volkswagen and Nissan.

chart courtesy Goldman Sachs

Goldman Says the Bull Run Is Over

Timing is everything, and Goldman Sachs nailed it today with a research note to clients this morning declaring that one of the longest running bull markets in history is coming to an end. The bank's research cited a decline in corporate profits to the tune of 5% from 2019. Goldman cites the following catalysts for lowering its profit estimates:

Lower crude oil prices that reduce energy company profits;
Lower interest rates that squeeze net interest margin (NIM) for financials;
Lower volume of business activity and reduced consumer spending that curbs revenues for companies across many industries.

Goldman expects the Fed to cut rates by 0.50% at its meeting next week, but the damage has already been done to corporate balance sheets. The bank expects the S&P 500 to dive to 2450, a 10.6% drop from current levels, in the first and second quarters of 2020, then rebound to 3200 by year end.

We'll see if the bank gets that timing right too.

Individual Investors are Undaunted

Individual investors are leaning into Warren Buffett's famous axiom, "Be fearful when others are greedy, and be greedy when others are fearful," despite the steep correction across U.S. markets since late February. According to trading data from Fidelity Investments and Vanguard, two of the biggest brokers serving retail investors, their clients are showing no signs of panic and are adding stocks to their portfolios in the midst of a steep market sell-off that has brought the S&P 500 down close to 20% from its highs of February 19th.

The majority of clients at Vanguard, which manages over $5.6 trillion, moved money into equities as opposed to fixed income, according to the firm. While trading activity nearly doubled during the last two weeks, it was modest on an absolute basis. Approximately 1% of U.S. Vanguard households traded each day over the last two weeks; on a typical day, that number is 0.4%.

chart courtesy Bloomberg

Fidelity Customers Load up, too

Fidelity Investments, which manages $2.4 trillion in assets, also reported a similar surge in stock buying by its customers. Fidelity saw an equity buy-to-sell ratio of 2.11 to 1 on Monday, March 9th, even though U.S. markets plunged over 7%.

According to daily trading data, Fidelity's clients have been loading up on some of the most popular stocks like Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Disney (DIS). These mega-caps have seen their shares tumble off of record highs. But they are also buying a variety of ETFs that both track the major indexes like State Street's S&P 500 SPDR (SPY), and Invesco's QQQ (QQQ) Trust Series, a popular ETF that tracks the Nasdaq 100. Some investors have even tried to capitalize on the intense market volatility by scooping up shares of the ETN, TVIX, which is a 2X short-term volatility product that has been spiking due to the rapid rise and fall of prices of late.

chart courtesy Fidelity Investments

More News:

Vivint Solar Falls to Support, Analysts Remain Bullish

Individual Investors Calmly Buy Stocks During Sell-Off

3 Charts Suggest Traders Will Remain Bullish on Biotech

(chart courtesy YCHARTS)

The biggest winner today was Moderna, which is developing a vaccine for COVID-19, a task made more urgent by the announcement by the World Health Organization (WHO) that COVID-19 is officially a pandemic.

Stocks were slammed today by the aforementioned WHO announcement. Norwegian Cruise Line is emblematic of the cruise line industry in general, which has been crushed by plummeting demand due to the virus. Oil companies also fell again, as the price of oil slumped close to 5% today. Boeing announced it was freezing hiring and was tapping into a large line of credit, which sent its stock down further.

Word of the Day

Bear Market

A bear market is a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Typically, bear markets are associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time - typically two months or more.

Today in History

March 11, 2020

Today the Dow Jones Industrial Average ended its longest bull run ever. It had started on March 9, 2009, just over 11 years ago. The Dow bottomed out that day, closing at 6547.05. That marked the index's low point after the global financial crisis, which was kicked off by the collapse of the U.S. real-estate market. The current bull market was ended by a combination of two factors. The first was the spread of the COVID-19, a novel coronavirus that the World Health Organization recognized as a global pandemic today. This virus has caused store closures, factory closures, lowered travel, cancelled conferences, and caused countless other disruptions to the world economy. That is not even considering the more than 4,000 human lives lost. The second was a collapse in global oil prices caused by the failure of Saudi Arabia and Russia to reach an agreement on oil production cuts. Saudi Arabia massively cut prices and boosted production to punish Russia for not agreeing to oil production cuts, sending the price of oil crashing down. While lower oil prices can be stimulative to the economy, any very sharp change in prices will cause significant disruption to global markets. It is important to remember that the Dow is not that representative of the market as a whole, being made up of only 30 stocks, and being price weighted. However, the more representative S&P 500 is close to bear territory, so keep an eye out.