foxex: Bewitched

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. US markets tumble to end worst week since 2008

2. Oil prices tumble again, heading for worst month in history

3. The unemployment crisis is about to begin

4. The earnings cliff is approaching

5. What to expect next week

Markets Closed

Dow
19,173.98
−913.21 (-4.55%)

S&P
2,304.92
−104.47 (-4.34%)

Nasdaq
6,879.52
−271.06 (-3.79%)

VIX
66.04
−5.96 (-8.28%)

Bitcoin
$5,929.59
−$272.95 (-4.40%)

US 10-Yr Yield
0.938
−0.181 (-16.18%)

Year-to-Date

Dow
19,173.98 (-32.81%)

S&P
2,304.92 (-28.66%)

Nasdaq
6,879.52 (-23.33%)

Russell 2000
1,014.05 (-39.22%)

Crude Oil
$19.84 (-56.78%)

US 10-Yr Yield
0.938 (-51.12%)

Getty Images

Markets Today

It was a rough end to a rough week, with U.S. markets putting in their worst five days since 2008 and on track for the worst month since 1987. It wasn't much better for global markets either as the economic impacts of the coronavirus continue to amplify as businesses close, consumers pull back on their spending, and layoffs begin. Equity markets tend to react early and intensely to external shocks as the old "Fear and Greed" instincts kick in. But this is clearly becoming an economic shock that will have a profound impact on millions of people around the world.

As for the markets, the selling accelerated into the close today—the last day NYSE floor brokers and traders will be at the stock exchange for the foreseeable future as they move to complete electronic trading. It was a vexing day to be there as we had what is called Quadruple Witching Day, which refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. That led to an unwinding of a lot of positions and heavy selling to close an intense week.

The damage to global markets has been extensive (see below). Many will eventually recover, as we are seeing in some Asian markets. But the economic damage is just beginning.

chart courtesy YCharts

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Headlines:

President Trump said that he would start using his powers under a Korean War-era law, the Defense Production Act, to try to increase the production of ventilators and masks as hospitals around the country warn of shortages.
California and New York strengthened emergency measures in response to the growing coronavirus crisis, tightening restrictions on residents and businesses, as the number of worldwide deaths from the novel coronavirus doubled in a week to more than 10,000.
United Airlines warned it could cut jobs if the U.S. government doesn't quickly provide aid to the industry, which is struggling with the devastating impact of the coronavirus on travel demand.
Walmart (WMT) is hiring 150,000 temporary employees through the end of May and spending nearly $550 million on bonuses for hourly workers. The retailer's stock is up almost half a percent year-to-date.
American Airlines is shifting some of its biggest idled jets to ferry just cargo—the carrier's first flights without passengers in nearly four decades. The Boeing Co. 777-300s will fly medical supplies, military mail, ecommerce packages, and high-demand office equipment as more people work from home, the airline said in a statement.
Brazil will ban travelers from about three dozen European and Asian nations from entering the country. The ban doesn't apply to Brazilians or foreigners living in the country and will last for 30 days starting Monday.
Teva Pharmaceutical plans to donate six million tablets of hydroxychloroquine sulfate to help U.S. hospitals meet a potential surge in demand. While the malaria drug has yet to be approved for virus patients, Trump has said he urged health authorities to expand its use.
U.S. makers of toilet paper ramped up production to avoid being caught short. P&G said it'll make as much Charmin as needed, while Georgia-Pacific increased shipments by about 120% above its normal capacity. Nielsen data shows sales rose 60% in the week to March 7th.

The Coming Unemployment Crisis

While we focus a lot on the movement of financial markets, it's becoming abundantly clear that we are facing an economic shock and not a market shock. The staggering losses in the stock market have been shocking, to be sure, but it will pale in comparison to what is about to happen to America's workforce in the coming months.

Unemployment claims shot up to 200,000 this week, but they are expected to climb into the millions in the coming weeks. The hit will be hardest to low-income hourly service workers. Industries that have and will be impacted the hardest (e.g., leisure and hospitality, transportation) employ more hourly workers than the average, according to the Labor Dept. These are also the kind of workers that really can't work from home due to the industries they work in and their job functions.

Sadly, most of these workers are already living paycheck to paycheck, so a decline in their earnings or losing their job outright could be devastating.

We put this handy guide together for our readers who are asking us a lot of questions about how to navigate their investments and personal finances in times of heavy volatility. Take a look. We hope it helps.

chart courtesy FactSet

The Coming Earnings Cliff

The big disconnect that is bewitching investors is that stocks keep falling beyond their fundamentals. Put another way, since stocks are typically priced based on their future earnings, investors should be able to provide a range of where they should trade given normal circumstances.

The problem is that we are not in normal circumstances. Even though companies have lowered their profit forecasts, their stocks have sold off way beyond what they are telling us to be their worst case scenarios. They have become "oversold" as investors doubt those worst cases because investors know that companies really have no idea how bad things will get. In other words, the E in Price to Earnings is in doubt, so investors are driving down the price by selling.

The same thing happens in a raging bull market, as well. The chart above shows when the change in forward price to earnings disconnects with the actual price of the S&P 500. On the far right you can see how we have crashed through the trend line as earnings forecast plunge.

chart courtesy @theirrelevantinvestor

The Good News...

Is that all bear markets come to an end, eventually. It feels extreme now because it is. But bear markets are a natural part of the market cycle, and while this one was brought on and inflamed by a global health pandemic, it will pass one day.

In the meantime, remember to take care of yourself and your families. We all need each other right now.

What to Expect Next Week

Here's a look at how different asset classes have been doing:

Here's a list of economic events for the week ahead:

Monday, March 23:

Canadian Wholesale Sales (January)
Japanese Preliminary Services Purchasing Managers' Index (PMI) (March)

Tuesday, March 24:

Eurozone Preliminary Manufacturing, Services ,and Composite PMI (March)
U.K. Preliminary Manufacturing, Services, and Composite PMI (March)
French Preliminary Manufacturing, Services, and Composite PMI (March)
German Preliminary Manufacturing, Services, and Composite PMI (March)
U.S. Preliminary Manufacturing, Services, and Composite PMI (March)
Brazilian Retail Sales (January)
U.S. New Home Sales (February)

Wednesday, March 25:

German Business Expectations (March)
German Ifo Business Climate Index (March)
U.K. Consumer Price Index (CPI) (February)
U.K Producer Price Index (PPI) (February)
U.S. Durable Goods Orders (February)
U.K. Nationwide Housing Price Index (January)

Thursday, March 26:

GfK German Consumer Climate (April)
ECB Economic Bulletin
U.K. Retail Sales (February)
Bank of England Meeting Minutes, Rate Decision, and QE Amount (March)
U.S. Gross Domestic Product (GDP)
U.S. Retail inventories Excluding Autos (February)
Tokyo Core CPI (March)

Friday, March 27:

U.S. Michigan Consumer Sentiment and Expectations (March)
U.S. Personal Consumption Expenditure (PCE) (February)

Stimulus Phase 3
The U.S. has enacted two stimulus laws so far, nicknamed Phase 1 and Phase 2. Phase 1 spends $8.3 billion, mostly allocated towards slowing the spread of the virus and finding a vaccine. Phase 2 was substantially larger, at about $100 billion, and included funding for free coronavirus testing for the uninsured, paid sick leave for certain workers, increased funding for Medicaid, and increased unemployment benefits. However, all of that seems relatively minor to the proposed Phase 3 plan. While nothing about the plan is definitive, the proposals will allocate roughly $1 trillion to stimulus through both refundable tax credits, small business loans, and emergency bailout loans to various troubled industries. Phase 3 is the "check for every American" bill you may have heard about. You can read the bill here and keep up with our coverage of stimulus here. The bill is currently working its way through the Senate, and due to its enormous size, it will likely have a substantial impact on the markets, so keep an eye on its progress.

Nike and Micron Earnings
Next week, shoe and apparel maker Nike (NKE) and memory chip maker Micron Technologies (MU) will announce earnings. The companies both announce earnings somewhat outside the normal earnings cycle because of their odd fiscal years, Nike's ends in May and Micron's ends in August. While these two are by no means a representative sample of all companies, they can give us at least some preview as to what may happen to earning because of the COVID-19 crisis. See our full earnings previews here for Nike and Micron.

BOE News
The U.K.'s central bank, the Bank of England, has been pouring on the monetary stimulus. It recently announced an unscheduled rate cut, and its scheduled meeting happens next Thursday. It will release its meeting minutes, which may give some guidance as to how it is going to handle the coronavirus crisis going forward. Having just cut rates down to 0.1%, the Bank of England governor, Mark Carney, has said he will not implement negative interest rates, so we'll see if that promise holds.

More News:

Digital Payment Stocks Could Enter Bear Markets

These Stocks Could Get Booted From the Dow Jones Industrial Average

3 Credit Services Stocks Trading at Multi-Year Support

Participate in Our Investing Survey!

(chart courtesy YCHARTS)

Shares of ONEOK are up by an impressive 33% after the natural gas company reported that it's expecting to see a 25% increase in earnings as a result of recent expansion projects. Capri Holdings' share price has risen by over 30%; the fashion company announced today the amendment of its revolving and term loan credit agreement.

Airline stocks are down once again due to the outbreak, including Southwest (over 12%) and American (almost 12%), with the latter announcing its first cargo-only flight in roughly 36 years. Shares of American Water Works have fallen by over 11% as commercial and industrial industries are purchasing fewer volumes of water amid consumers staying home and businesses shutting down.

Word of the Day

Quadruple Witching Day

Quadruple witching refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September, and December.

Quadruple witching is similar to the triple witching dates, when three out of the four markets expire at the same time, or double witching, when two markets out of the four markets expire at the same time.

image courtesy royalacademy.org.uk

Today in History

March 20th, 1602:

The western world's first major publicly traded company is born, as the Dutch legislature grants a monopoly on trade to the Verenigde Oostindische Compagnie, or Dutch East India Company, which deals in booming consumer products like cloves, tea, black pepper, and Chinese porcelain. In 1609, the company's directors declare that investors cannot sell their shares back to the company, only to other investors—giving birth to the modern stock market.

Larry Neal, The Rise of Financial Capitalism: International Capital Markets in the Age of Reason (Cambridge University Press, Cambridge, 1990), pp. 8–9; Violet Barbour, Capitalism in Amsterdam in the 17th Century (Univ. of Michigan Press, Ann Arbor, 1976), pp. 17, 77; http://batavia.rug.ac.be/