foxex: The Unraveling

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. US markets tumble more than 7%

2. Oil prices crash 24% as OPEC+ unravels

3. Markets on the cusp of a bear market

4. How might the global economy recover?

Markets Closed

Dow
23,851.02
−2,013.76 (-7.79%)

S&P
2,746.56
−225.81 (-7.60%)

Nasdaq
7,950.68
−624.94 (-7.29%)

VIX
54.46
+12.52 (+29.85%)

Bitcoin
$7,870.20
−$1,245.35 (-13.66%)

US 10-Yr Yield
0.499
−0.207 (-29.32%)

Markets Today

We've had some serious sell-offs in recent days, but nothing like what we saw today. U.S. markets plunged more than 7% following similar declines in Europe as oil prices slid 24% after the agreement between OPEC and OPEC+ (specifically, between Saudi Arabia and Russia) disintegrated over disagreements over crude oil production cuts. OPEC, led by Saudi Arabia, was pushing for production cuts in an attempt to shore up prices, which have been in precipitous decline for over a year. Russia, which is not a member of OPEC, but is a member of OPEC+, objected to the production cuts. Saudi Arabia responded by ramping up production and cutting its prices in order to push global oil prices down and punish Russia for not cooperating.

This led to a massive sell-off in oil that began Sunday evening, sending prices down 30%. Given oil's key role powering industry around the world, and its value as a commodity that underpins some of the biggest companies and countries on the planet, a decline of this magnitude creates massive ripple effects across the global economy.

Investors ran from stocks, driving U.S. markets dangerously close to bear-market territory. Today's market sell-off was the worst since 2008. The sell-off in oil was the worst since 1991 when the Gulf War started.

It's hard to believe that U.S. markets were at record highs as recently as February 19, but between the coronavirus outbreak and this plunge in one of the most important commodities on the planet, this is the stew we are stuck in.

In the last 14 trading days since U.S. markets hit record highs on February 19 the S&P 500 has declined 18.5%, the financial sector (as seen through the XLF ETF) has fallen 26.5%, and the energy sector (as seen through the XLE ETF) is down a whopping 38.2%.

chart courtesy YCharts

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Headlines:

Italian Prime Minister Giuseppe Conte announced that quarantine measures previously affecting about 1/3 of the country will be expanded to all of Italy. People across the country will only be able to travel for work and family emergencies.
The yield on the 10-year U.S. Treasury fell to another record low of 0.318% as investors continue to seek its relative safety during the global stock sell-off. Its yield was above 1.5% as recently as mid-February.
The executive director of the Port Authority of New York and New Jersey has tested positive for the coronavirus, as the state of New York surpassed Washington state as the state with the most cases in the country.
President Trump is meeting with his economic advisers at the White House this afternoon to discuss possible stimulus packages to bolster the economy. This comes as the coronavirus and sell-off in oil threaten to send the U.S. economy into a recession. Some of the measures under consideration include paid sick leave for people who have contracted coronavirus, relief for small businesses, and relief for industries that have been impacted by the outbreak.
Twitter will appoint three new directors to its board and create a committee to review its leadership and governance, as part of an agreement with activist investor Elliott Management Corp. and private equity firm Silver Lake. The pact leaves CEO Jack Dorsey in place.
Wells Fargo Chairman Elizabeth Duke and board member James Quigley have resigned from the board. They were among the executives scheduled to appear before the House Financial Services Committee this week.
Amazon is going to begin selling its cashier-less convenience store technology to other retailers, according to Reuters. Dubbed "Just Walk Out," the system already has several buyers, according to the report.
Apple sold fewer than half a million smartphones in China in February, according to Reuters. This is down from 1.27 million in Feb. 2019. Overall mobile phone shipments in China halved last month.

chart courtesy LPL Financial

Heading into Bear Territory

With today's sell-off, the S&P 500 is down more than 18% from its most recent highs on February 19. That's dangerously close to bear-market territory, which is typically considered to be a 20% decline from recent highs in a security or index. Given the pace of recent declines, we could be in that danger zone any day now.

The question we keep getting from our readers is whether we are in a recession or not. It's hard to tell when you are in a recession until it's well in the rear-view mirror, but it's also important to know that recessions and bear markets don't always walk hand in hand. Economies and markets are different, but they do tend to influence each other.

Bear markets come in all kinds of shapes and durations. The most recent one, which only lasted around three months at the end of 2018, did not bring on a recession, as the Fed promptly changed its stance on interest rates, and started lowering them. The bear market of 2011 lasted about six months, and was not accompanied by a recession. The bear market from 2007-09 did come with a recession, as well as a complete unraveling of the housing market and banking system.

While the U.S and most developed countries are in a far different place than 2007-09, the global economy was already slowing before the coronavirus outbreak. That has exacerbated the problem, and will likely push the U.S., Europe, and possibly China into a recession. Some European markets are already in bear territory and the U.S. is likely to follow given the pessimism around stocks right now.

More News:

Which ETFs Have Outperformed Through the Sell-off

Is It Time to Buy China Stocks?

US Oil: What Levels Should You Be Watching?

(chart courtesy YCHARTS)

Natural gas drillers, such as EQT, are gaining, even as the energy sector as a whole is nose diving. This is because many oil shale producers also produce natural gas as a byproduct, and the drop in oil prices is likely to reduce the amount of shale production. This may help prop up natural gas prices, which have been low. Another sector benefiting from the collapse in oil prices is the car service and parts business. Companies like Advanced Auto Parts are gaining on the expectation that oil prices will lower gasoline prices and lead to more driving. Bleach-maker, Clorox, rose as people scramble to buy disinfectants to stave off the coronavirus.

For today's losers, it's tempting just to say "everything else," as there were only 17 stocks with positive price moves today in the entire Russell 1000 Index. That said, the losses were clearly concentrated in oil companies, driven by the enormous decline in oil prices. 19 of the 20 biggest losers in the Russell 1000 were in the energy sector, all of which had fallen by more than 30%.

Word of the Day

Circuit Breaker

Circuit breakers are measures approved by the Securities and Exchange Commission (SEC) to curb panic-selling on U.S. stock exchanges. They apply both to broad market indices such as the S&P 500 as well as to individual securities. The circuit breakers at the NYSE were tripped today as the DJIA fell more than 7%, which caused a 15 minute halt in trading so the members of the stock exchange could process all the sell orders.

Image source: Hulton Archive / Stringer

Today in History

March 9, 1776
Today in 1776, "An Inquiry into the Nature and Causes of the Wealth of Nations", one of the foundational works of economics, was published. The book, commonly referred to as just "The Wealth of Nations," was written by Scottish economist Adam Smith, and argued in favor of free markets against the prevailing ideology of mercantilism. Mercantilism is the philosophy that prosperity is a zero-sum game among nations and that to be strong, a country needs to erect tariff barriers and establish colonies in a closed trading systems to hoard wealth in the form of gold and silver bullion. Among other ideas, Adam Smith proposed that freer markets and trade could better enrich countries than if those things were tightly controlled. One of his most famous ideas was that people selfishly acting to enrich themselves would lead to more economic prosperity than if people were actively trying to make a prosperous society overall. He described this by saying people acted as though "led by an invisible hand."

Source: https://www.investopedia.com/updates/adam-smith-wealth-of-nations/