Tight Spot

Tight spot.  Stocks tumbled yesterday as investors learned that Covid-19 is not just a China thing.  More and more companies are reporting concern about the virus’ effects on performance.

 

N O T E W O R T H Y

 

The not-so-bad:  OK, so the Dow Jones Industrial Average lost over -1000 points in yesterday’s session… OUCH!  Now that we got that out of the way let’s talk about how bad it was, in relative terms.  While many focus on the point drop, which was just the third time a loss exceeded 1000 in history, it was nowhere near the worst compared to historic daily drops, in percentage terms.  First of all, the other two greater-than-1000-point drops both occurred in February, 2018.  Bet you forgot about those already 😉  Yesterday’s -1031.61 point drop was good enough to erase -3.56% in a single session, putting the index in the red, year-to-date.  If we look back in history again, the -3.56% point drop doesn’t even make it to the top ten list.  FYI, the worst single day percentage loss was -22.6% on Black Monday in October, 1987. You might actually remember that day.  It was bad, the Dow closed at 1,738 in the session.  See where I am going with this?  The same index closed at 27,960 yesterday.  That’s nearly +1608% higher, if you were wondering. Daily percent drops of more than 2% are actually more common than you may think and are considered normal corrections. That is not to say that we are out of the woods just yet, but I wanted to provide some perspective.

 

The good:  There is a little box in my desk that says open in an emergency.  Inside the box sits a slide that I use in most of my presentations and is entitled “Long Term Approach Pays”.  It refers to a Charles Schwab study of different holding period returns from a historic perspective.  The study found that if you held the S&P500 for 3-year periods your greatest potential return was +31% and your greatest potential loss was -27%.  Let’s call that a one-to-one risk to return potential, which is not that great.  The big news is that as you increase your hold time, the ratio improves drastically.  If you held for 7-year periods your upside was +20.1% while your downside was only -1.4%.  Now those are some pretty good odds.  The moral of the story is that if you can afford to stay the course and have longer-term focus, days like yesterday become blips.  If you add diversification to the mix, the story gets even better, but that is a topic for another day.

 

The not-so-good:  The viral outbreak is real, and aside from the mounting cases (now 80,336) and deaths (now 2,704), there has been and will be financial impacts.  I have been writing about these daily and there are more and more companies coming forward with statements regarding negative potential impacts on performance.  The obvious ones are companies which are exposed to the Chinese supply chain (Apple, automakers, etc), companies which rely on Chinese consumers (LVMH, Tiffany & Co…. also Apple), travel and leisure (Carnival, MGM Resorts International, airlines, etc.), and natural resources (crude oil, Exxon Mobile, Chevron, etc).  The US economy is a different story and it may be somewhat insulated from the Chinese downturn, but there are risks.  The primary risks are a further slowdown in corporate spending (27% of US GDP) or worse yet, a slowdown in consumer spending over fears of virus spread or recession (66% of US GDP).  If the market continues its slide, there could be indirect impacts on spending as there is evidence that consumers are more confident when equity markets are doing well… even if they don’t own them (go figure). This is why the Fed will be monitoring financial markets closely, even though it is not part of their mandate.

 

THE MARKETS

 

Stocks dropped heavily yesterday as the spread of the Coronavirus became more evident to investors.  Though the virus has not yet been officially labeled a pandemic, it certainly has the features of one as cases are spiking in Italy and the Gulf States.  The S&P500 dropped by -3.354%, the Dow Jones Industrial Average sold off by -3.56%, the Russell 2000 traded down by -3.01%, and the NASDAQ Composite Index slid by -3.71%.  Bonds rallied and 10-year treasury yields dropped by -10 basis points to 1.37%.  Crude oil lost -3.65% yesterday as diminished demand fears spiked.

 

NXT UP

 

– FHFA Housing Price Index is expected to have grown by +0.4% compared to last month’s growth of +0.2%.

– The Case-Shiller US Housing Price Index is expected to have grown by +3.6% year over year compared to the last reading of +3.54%.

– The Conference Board’s Consumer Confidence Index may have grown to 132.1 from 131.6.

– Fed Vice Chairman Richard Clarida will speak today.  He will, no doubt, be asked about Coronavirus impacts on Fed policy.

– This morning Home Depot, Lumber Liquidators, American Tower, and Macy’s beat analyst estimates.  After the bell earnings will include Revolve Group, Public Storage, Smile Direct Club, Salesforce.com,  Caesar’s Entertainment, and Toll Brothers.

daily chartbook 2020-02-25