foxex: Mega-Rally!

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. DJIA soars 5.1% to biggest point gain in history

2. 10-year U.S. Treasury yield hits another all-time low

3. Three scenarios for global growth impacts

4. R.I.P. Jack Welch

Markets Closed

Dow
26,703.32
+1,293.96 (+5.09%)

S&P
3,090.23
+136.01 (+4.60%)

Nasdaq
8,952.17
+384.80 (+4.49%)

VIX
33.42
−6.69 (-16.68%)

Bitcoin
$8,883.07
+353.30 (+4.13%)

US 10-Yr Yield
1.088
−0.039 (-3.46%)

Markets Today

U.S. markets snapped back today with the DJIA ripping 5.1% higher, its biggest point gain in history and its biggest percentage gain since 2009. The S&P 500 and the Nasdaq climbed 4.6% and 4.5%, respectively. It was what we like to call a "relief rally"—a sharp rise in prices following several days in a row of selling. There isn't much rhyme or reason for days like this other than to say that some investors may have deemed that the market and some key securities were oversold in last week's rout and prices looked attractive. We are far from out of the woods, but that didn't stop some investors from heavy buying today.

The news has not improved, but the possible monetary and fiscal response to it has changed. As for the news, WHO said the number of new coronavirus cases outside China was almost nine times higher than that inside the country over the last 24 hours.

As epidemics spread across other continents, new cases in China are falling as China reported just 206 new cases of the coronavirus on Sunday, the lowest number of new cases in that country since Jan. 22. Outside of China, the total number of cases now tops 8,739 across 61 countries, including 127 deaths, WHO said.

The central banks of Japan, the U.S., Australia, and others have said they will do what is necessary to bolster their nation's economies amid the outbreak, which many have translated as future interest rate cuts. That's yet another reason the yield on the benchmark 10-year U.S. Treasury fell to another record low of just under 1.03%. Rates will be cut, which is one of the reasons stocks rallied today—but whether or not those cuts will actually steer the global economy away from a recession is the multi-trillion dollar question.

Headlines:

The Group of Seven finance ministers will lead a global teleconference on Tuesday to discuss their response to the threat posed by the coronavirus outbreak to the world economy, according to Bloomberg. The finance chiefs will be joined by their central bank governors.

Gilead Sciences has agreed to buy biotech Forty Seven for $4.9B in cash, joining the list of major U.S. drugmakers trying to strengthen their range of cancer treatments. The deal will hand Gilead magrolimab, a treatment developed by Forty Seven that is designed to help the body's own immune system combat a range of cancers, including leukemia.
Robinhood, the popular free trading app, experienced technical issues on the company's online service when U.S. markets opened on Monday morning. Those issues persisted throughout the day. Robinhood is the latest online investing app that has experienced technical failures during the intense volatility last week. E*TRADE and Fidelity also had outages last week.
The Indian rupee weakened for the third straight session on Monday, falling to its lowest level in more than 15 months, after two fresh cases of the coronavirus were detected in the country. One of the two new cases was detected in the capital, New Delhi, while the other was in the southern state of Telangana, the government said in a statement taking the total number of people who have tested positive in the country to five.

Caixin China manufacturing PMI fell to 40.3 in February from 51.1 in January, the steepest fall in the survey's 16-year history and a worse contraction than analysts expected. The sector is suffering amid shutdowns, supply chain disruptions, staff shortages, and travel restrictions. However, business confidence rose to a five-year-high as firms expected a "V-shaped" recovery or output to rebound once restrictions are rolled back. The official PMI fell even lower to 35.7 in February, a record, from 50.0 in January.
Activist hedge fund Elliott Management has taken a $1 billion stake in Twitter and nominated four directors to its board, according to The Wall Street Journal. Elliott is reportedly looking to replace Twitter co-founder Jack Dorsey as CEO and has spoken with management about it. Shares of TWTR climbed more than 6% on the news.
Brexit trade talks start today. Britain's chief negotiator David Frost arrives in Brussels today with 100 officials to begin the first round in the negotiations. The U.K. wants a free trade deal and to be independent of EU rules. It will leave the bloc's single market and customs union at the end of the year.
Pete Buttigieg, Tom Steyer, and now Amy Klobuchar have dropped out of the Democratic presidential primary race after the South Carolina primary. Tomorrow 15 states and territories will hold their primary events during what is known as "Super Tuesday."
Over 80,000 people belonging to the persecuted Uyghur community in China were forced to work in factories in the supply chains of at least 83 well-known global brands, according to a report from the Australian Strategic Policy Institute (ASPI). The brands include Apple, BMW, Gap, Huawei, Nike, Samsung, Sony, and Volkswagen.

chart courtesy Factset

Scenarios for Global Growth and Decline

The coronavirus' impact on global growth is really a question about depth and time. How deep will the impact be to production and manufacturing, and how long will it last? The timing is unfortunate since many developed countries, including China and Germany, were already in contraction last month.

Morgan Stanley, among other banks, has been handicapping the impact based on three scenarios. They are as follows:

Scenario #1 – Containment by March:

The virus outbreak is contained by end-March and production disruption is limited to the first quarter of 2020. Policy-makers in China and Asia will provide meaningful policy support, with China expanding its fiscal deficit by 120 basis points, keeping it high for the second year running. Global growth dips to 2.5%Y in 1Q20 (from 2.9%Y in 4Q19), but recovers meaningfully in 2Q20.

Scenario #2 – Escalation in new geographies, disruption extends into 2Q20:

New cases continue to rise in other parts of the world, before peaking by end-May. The disruption extends into 2Q20, affecting corporate profitability in select sectors, risking the emergence of corporate credit risks. If the dislocations in securities markets also persist into 2Q20, the sharp tightening in financial conditions could exacerbate the impact on growth via weaker corporate confidence, lower capex spending, and cutbacks in hiring activity.

In response, central banks will cut rates as the U.S. Federal Reserve is expected to do in mid March. Global growth averages just 2.4%Y in 1H20, but picks up by 3Q20.

Scenario #3 – Persisting into 3Q, escalating recession risks:

The virus continues to spread into 3Q, encompassing all the large economies. China faces a renewed rise in new cases as it restarts production. Disruption continues into 3Q. The extended disruption to economic activity damages corporate profitability and brings about a rise in corporate credit risks and significant tightening in financial conditions, which exacerbate the slowdown in global growth.

Central banks will embark on a renewed easing cycle, with the potential for a coordinated response. Despite extensive interest rate cuts and fiscal stimulus by the world's biggest economies, global growth stays weak (i.e., below 2.5%Y) between 1Q20–3Q20.

Put another way... if the virus is contained in the first quarter of the year, the economic damage is minimal.

Visualizing Last Week's Damage

Last week's sell-off was so "last week." But the damage to some of the biggest stocks was extensive. And, as we know, the biggest stocks, such as Apple, Amazon, Microsoft, Google, and Facebook, carry the market up and down given their heavy market caps. Some of those stocks, like Apple, came back with a vengeance today, rising more than 9%. Others are still hobbling. But the chart above, courtesy of FactSet, does a nice job visualizing the companies and the sectors that were hit the hardest.

More News:

Twitter Stock Rebounds on Activist Investor Involvement

Retail Earnings Could Move This Week's Market

Epic Selling in Stocks and ETFs Is Not Over According to These Charts

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(chart courtesy YCHARTS)

Shares of Cimarex Energy rose by nearly 8% today on the heels of its strong Q4 results for 2019. Norwegian Cruise Line Holdings managed to stay afloat, its stock price increasing by over 7%, even as other cruise line stocks continue to suffer with more and more coronavirus cases being reported across the globe.

Speaking of the coronavirus, shares of pharmaceuticals company Mylan fell by nearly 8% over concerns that its upcoming financial results will be harmed by an existing shortage in the global drug supply chain. American Airlines' stock price also decreased by almost 8%, with the airline being forced to waive change fees amid the ongoing outbreak.

Word of the Day

Dead Cat Bounce

A dead cat bounce is a temporary recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. A dead cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock or index. Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—where prices temporarily rise. The name "dead cat bounce" is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.

Image: CNBC

(Yesterday) in History

March 1, 2020

We are taking editorial license today given the news of the passing of former GE Chairman and CEO Jack Welch. Welch died Sunday, March 1, 2020, at the age of 84 years old. Welch was a legendary business leader who transformed General Electric from an appliance maker into one of the most valuable industrial companies on the planet.

Jack Welch was the chairman and CEO of General Electric from 1981–2001. Under Welch's tenure, GE's market value increased from $14 billion to $410. Fortune magazine dubbed him Manager of the Century in 1999, and his lessons on leadership, negotiating, and business strategy are still taught today.