foxex: Looking for Shelter

Chart Advisor | Focus on the Price

Wednesday, March 18, 2020

1. Oil falls and yields climb despite rate cuts

2. Flight to cash as stock and bonds both fall

3. Safety stocks offer limited help

Market Moves

The price of oil dropped by nine percent in trading today, paving the way for most of the U.S. to experience gasoline prices under two dollars a gallon. Many states in the Midwest region could experience prices closer to one dollar a gallon. In Alberta, Canada, price for a gallon of gas may even get below 50 cents in U.S. dollars some time in the next two weeks if oil prices remain this low.

A price move like this may get people talking about the D word (as in deflation). That is not something that the Fed likes to think about, especially after firing off so many monetary-policy salvos at the looming economic hit. Such concerns would only add to the currently high historic and implied volatility we are experiencing right now.

The strong moves by the Fed lowered its lending rates, however, yields on the U.S. 10-year Treasure Note index (TNX) have continued to climb. This has driven bond prices lower and, more importantly, mortgage rates higher. The impact on the new-home construction industry has been devastating.

The chart below shows a comparison of TNX with shares of M/I Homes Inc. (MHO). This company's share price has fared the worst among the larger capitalized companies in the industry group, but the move shows just how hard that group has been hit. This is an important group to watch to determine the long-term impact of this bear market on the overall economy.

Flight to Cash as Stock and Bonds Both Fall

As stocks look to find a semblance of support, certain ETFs are worth keeping an eye on. Three in particular include State Street's S&P 500 ETF (SPY), State Street's Gold price index ETF (GLD) and iShares 20+ Year Treasury Bond ETF (TLT). The chart below compares these three with shares of Amazon (AMZN) to give an idea of how the market's demand for each has varied since the beginning of the year.

It is interesting to note how bond prices have fallen so strongly over the past few days, gold prices less so, but Amazon shares seem to have held their ground as stocks in general continue to tumble. The reasons for this aren't hard to guess at, but it is worth keeping an eye on to see when these trends change. Any change of trend here would be an indication that stocks may be ready to rebound.

3 Ventilator Manufacturer Stocks in Focus

Food Stocks Soar in Flight to Safety

SPONSORED BY FIDELITY INVESTMENTS
Investing in Women in More Ways Than One
Hiring and retaining women is essential to making financial expertise broadly accessible. Here's why Fidelity is prioritizing women's career growth and potential.
Learn More »

Safety Stocks Offer Limited Help

During times of market panic, dividend stocks tend to be attractive to investors. These so-called safety stocks usually feature lower volatility and a stable dividend to help cushion price shocks. Right now Duke Power (DUK) and Walmart (WMT) are in opposite places from what most investment professionals might expect, however both have kept their shareholders from experiencing the same kind of drawdown that the benchmark indexes in stocks have shown. Even dividend payments are no safety against the dangers of a market like this.

The Bottom Line

Stocks opened lower but rebounded today giving investors encouragement that support levels might be near. The housing industry group is getting hammered, though, and this may have longer-term ramifications for the rest of the economy since mortgages are such a large part of the economic mechanism. Amazon and Walmart shares seem to be holding on fairly well in these times of shelter-at-home policies.