March Is Live

March is live.  Stocks sold off again last Friday on further virus fears but managed to close well off intraday lows in response to a Fed statement.  Selling intensified through the day and Chairman Powell reminded us that the Fed is still working.

 

N O T E W O R T H Y

 

“I have nothing to offer but blood, toil, tears, and sweat”… and the Central Bank.  Well the first part of that tagline is a quote from one of my favorites Winston Churchill.  He proclaimed it in a speech to the House of Commons in May, 1940.  The second part of the tagline… well we will get to that in a minute.  First, I feel compelled to remind everyone that the stock markets are vagrant, they move around often, they don’t do as they are told, their behavior can be erratic at times, and most importantly, they can’t just only go up forever!  Why do I feel like I have to post a reminder?  A big part of investor behavior is related to psychology. I don’t have the time in this note to get into details, but there have been plenty of research papers and books written on the topic.  I would like to highlight one thing today.  For the most part, investors typically only remember the positive moves in the market and tend to forget those lean times.  Sure, mostly everyone remembers 2008 when the S&P500 lost -38.49% for the year… that was a bad one.  Since that year we only had two other losing years, 2015 and 2018 (-0.73% and -6.24%), which were mild in comparison.  Since its 2008 lows the S&P500 has risen +340% (that is an annualized growth of around +14%), even including last week’s rout.  So you can see how images in the rearview mirror can get a bit distorted.  Let’s quickly cover drawdowns, which are pullbacks from achieved highs.  Looking just beyond the financial crisis as the economy started to reestablish its footing and the markets began to trade off of its lows, things began to look up for beleaguered stock investors… but it was no straight line. From 2010 to current, the S&P500 has had eight drawdowns that were greater than -10% and eighteen which exceeded -5%.  The average intra-year drawdown of the S&P500  since 1970 is around -15%.  This latest drawdown, probably not over yet, stands at -12.76% as of Friday’s close.  The last big drawdown occurred in 2018 which weighed in at around -20%.  You may remember that one, or maybe not, because the Fed jumped in with its now historic Christmas pivot to turn markets around.  That pivot helped stocks climb by +44% from their lows to the high achieved just before this latest drop.  Now on to the Fed.  On Friday the selling in equities did not let up until a lifeline came in the afternoon session as Fed Chairman Jerome Powell made a rare statement which he said that the “…coronavirus poses evolving risks to economic activity”, that the Fed will monitor the situation closely and “use our tools to act as appropriate to support the economy.”  In other words, the Fed’s got the market’s back.  The statement is not surprising given the amount of cenral bank support offered in other countries. According to Fed Fund futures there is now a 100% chance of a -50 basis point rate cut by this month’s FOMC meeting.  Just one week ago, that probability was 0%.  Whether or not the cut occurs we can count on a few things.  There will be more blood for economies directly impacted by the virus (specifically economic shutdowns) as well as further toil for companies who rely on revenues from travel, lodging, and gaming.  For companies that rely on the Chinese supply chain such as auto manufacturers, consumer electronics, durable goods, etc., they can expect more tears.  For investors, there will certainly be some more sweat… but it’s nothing we haven’t experienced before.

 

THE MARKETS

 

Stocks sold off again on Friday capping off the worst week since the financial crisis.  The Fed statement caused a buying frenzy into the close, pairing daily losses. The S&P500 fell by -0.82%, the Dow Jones Industrial Average dropped by -1.39%, the Russel 2000 gave up -1.43%, and the NASDAQ Composite Index climbed by +0.01%.  Bonds traded up and 10-year treasury yields fell by -12 basis points to 1.15%.  Crude oil continued its slide down, falling by another -4.95% to $44.76.  WHILE YOU SLEPT, Putin announced that he would work with OPEC+ to support prices while China announced its official manufacturing PMI dropped to 35.7, its lowest level ever.  Expect another volatile day for energy.

 

NXT UP

 

– Markit Manufacturing PMI and ISM Manufacturing are expected to come in at 50.8 and 50.5 respectively, compared to last month’s 50.8 and 50.9.

– Construction Spending is expected to have grown by +0.60% compared to last month’s decline of -0.20%,

– The week ahead will feature Services PMI’s, The Fed Beige Book, Factory Orders, Durable Goods Orders, the monthly employment situation, and some more corporate earnings.  Please refer to the attached economic and earnings calendars for details.

daily chartbook 2020-03-02

econ numbers 3_02

earnings releases 3_02