We delayed sending this commentary until today as we wanted to see the market’s behavior and close yesterday and how it opened again this morning. Yesterday, the S&P 500 closed down 7.6% to 2,746.56 as investors punished financials and energy stocks. Energy names in the S&P 500, including Exxon Mobil, Hess and Marathon Oil, finished the day down more than 20%. Financial stocks ended down more than 10%. The equity benchmark suffered its worst day since Dec. 1 2008. However, it didn't even make it into the top 10 down days.
Investors continued to seek safer assets amid additional fears that the coronavirus will disrupt global supply chains and tip the economy into a recession. The yield on the benchmark 10-year Treasury note dropped below 0.5% for the first time ever, while the 30-year rate breached 1%. At one point early Monday, the 10-year slid to 0.318%.
Much of Monday’s anxiety came after Saudi Arabia on Saturday slashed official crude selling prices for April in a sudden U-turn from previous attempts to support the oil market. The move came after OPEC talks collapsed Friday, prompting some strategists to see oil prices crater to $20 per barrel this year.
More Fed rate cuts?
The Federal Reserve announced an emergency rate cut last week of ½ a percent to combat the economic impact from the virus, its first such move since the financial crisis. Traders expect the central bank to slash rates by three-quarters of a percentage point at its March meeting next week. The probability of rates being cut back to zero as they were after the financial crisis in 2008 are over 50% as of this writing.
We remain fixed on two issues that will affect future growth:
These intertwined subjects are difficult to quantify, so, let's briefly address the intangibles that affect sentiment.
Over 109,000 Global Cases
3,801 Global Death
3.4% Global Death Rate
Those are the hard numbers, but they don't reflect the human toll. In addition, there is the underlying fear of contagion and an upcoming impact on supply lines. To help alleviate some of the medical burden, President Trump signed a spending bill with an $8.3 billion package to provide resources to states and municipalities to screen, test and provide care to patients that have shown symptoms of contagion.
There is wide acceptance that stock markets may have overreacted to Bernie Sanders' early victories in Iowa and New Hampshire, but today's delegate count puts Joe Biden in the lead. We don't discuss politics here for politics sake, but Wall Street would not benefit from a Bernie Sanders presidency. It's true that the stock market doesn't like change, but traders are breathing a little easier on the increased possibility of a Donald versus Joe final round come the November contest.
We can add 1 + 1, but it doesn't quite add up to 2 just yet. As of today, we don't have good numbers on the global economic slowdown effects of contagion and we have a long way to go before election day. More importantly, we have no idea what changes there will be to consumer consumption - the driver of current moderate economic growth.
Volatility is here to stay, probably for the rest of the year. I would expect things to get worse before they get better. Our economic data has been strong and it didn't stop with last week's phenomenal jobs report. As good as it was, it was mostly dismissed because it reflected conditions before the coronavirus hit our shores. Volatility is a natural consequence of unexpected adversity. Earnings reports will continue to take a back seat to the psychology and temperament of investors as we collectively process news about the contagion.
Food for thought
Can you believe the market hit an all-time high less than 3 weeks ago? Yes, it was February 19th. Since then, you’ve certainly had enough of the media cramming coronavirus, oil price wars and stock market volatility down your throat. I suspect they will continue to do so until the next salacious topic comes along.
So, last night as I sat watching Andrew’s little league baseball game, something donned on me. The stands were full of people cheering and eating hot dogs and peanuts. The coronavirus and the media hype haven’t dissuaded them. The parking lot was full of gas guzzling SUV’s and trucks. The decline in oil prices will be welcomed by them as it translates to cheaper gasoline. The person sitting next to me briefly mentioned her oil stocks declining simply because she knew my profession. However, she wasn’t selling and has no intention to do so. There we were, doing what Americans do, enjoying camaraderie and supporting our home team. We put a man on the moon for heaven’s sake. We persevere, we triumph. These are the times that remind of us of the importance investing for the long-term.
Know that we are actively monitoring the markets and are following our process. Most of the current activity these past few weeks have been based on fear. There is little room for emotion in investing. Emotional decisions are often regretted; thus, we continue follow a process driven by fundamentals and facts.
As always, we are honored to serve you and welcome any questions.
P.S.: That's Andrew at bat for the Pirates. He struck out 6 batters and hit a homerun. Yes, they won, 11-2.