Pain Management

Pain management.  Stocks were hit hard in yesterday’s session as Coronavirus fears sharpened.  All of the major equity indices are in correction territory and bond yields continue to make historic lows.

 

N O T E W O R T H Y

 

• Not-to-do list.  Let’s get it out of the way first.  This has been one heck of a scary week for equities with the S&P500 slipping from all-time highs to correction territory in record time.  What typically happens on days like yesterday goes like this.  Initial confusion:  Investors want to know what’s going on, what is causing the market to sell off.  Confusion leads to fear:  Hopes that the market will turn around quickly fade and markets remind investors the there are in fact, many levels of pain.  Panic leads to justification:  Investors start to look for a bright side and they start to wonder “should I buy here?”  Here comes your list.  1. Don’t buy anything until the smoke clears and the market begins to show signs that it is stable.  The real drivers of the past few days’ selloff are still not completely clear and selling appears to be indiscriminate and across the board.  Remember that picking a bottom is a fool’s errand with more risks than benefits.  Remember the term: “the roads of Wall Street are paved with bones of the greedy.”  Don’t be greedy, leave a little on the table, and wait until the probability of success increases.  2. Avoid companies and sectors that have been and will clearly be impacted by the virus.  It is clear that sectors like airlines, travel, gaming, and energy will continue to see smaller revenues as demand is cut. Companies in those sectors have taken a drubbing and may appear to be cheap from a technical and fundamental perspective.  I say this often and it applies here: avoid buying things that are cheap for good reasons.  I am going to slip in a few to-do’s here.  3. This is a good time to think about your true risk appetite. Think of this as a stress test. Did you pass?  In these past few days if you worried about your financial future, your portfolio is probably too risky and warrants adjustment. Diversification across many stocks is not enough. Allocation across asset classes targeting overall portfolio risk is what is needed.  Speak to your advisor about this.  4. Focus on the future.  If you are a long term investor, times like this are painful but necessary realities on the path to long term success in the market.
• The only thing we have to fear…. Just a quick reminder that the stock market is not the economy.  Many professional stock pickers and perma-bulls can often be overheard saying things like “who cares about the economy, the stock market is the economy”.  Sure they are linked.  After all, strong companies should, in theory, have well performing stocks and strong companies make up a solid economy.  But let’s not forget that consumer spending makes up the bulk of US GDP (roughly 2/3). Consumer sentiment has remained strong, propped up by low unemployment, solid consumer balance sheets, low inflation, and low interest rates.  Should consumers start to become fearful and cut back spending, there will certainly be economic impacts.  I have mentioned this several times over the past few days but it bears underscoring.  There is evidence that consumer spending is impacted by stock market performance, despite the fact that the average consumer does not own equities.  The last time markets had a precipitous drop was in 2018 in which stocks fell by -20% in the fourth quarter.  Looking back, we can see that consumer spending during that quarter slowed along with business investment (which makes up about 27% of GDP).  Expect the Fed to be paying close attention to consumers in the weeks ahead.

 

THE MARKET

 

Yesterday was a tough session for stocks with all the major indexes in correction territory just days after reaching all-time highs.  The S&P500 fell by -4.42%, the Dow Jones Industrial Average dropped by -4.42%, the Russell 2000 traded off by -3.54%, and the NASDAQ slipped by -4.61%. Aggregate bonds were little changed and 10-year treasury yields fell by -7 basis points to 1.26%.  Aggregate bonds include all kinds of investment grade bonds and even they were under pressure yesterday.  Treasuries, considered the least risky, were the top choice for investors seeking shelter, which is why they traded up.  Crude oil continued its slide yesterday, dropping by -3.37%.

 

NXT UP

 

– Personal Income may have risen by +0.4% while Personal Spending is expected to rise by +0.2% compared to last month’s respective readings of +0.2% and +0.3%.

– The Core PCE Deflator is expected to be 1.7% year over year compared to last month’s read of +1.6%.  This is the Fed’s favorite inflation indicator.

– University of Michigan Sentiment may have fallen slightly to 100.7 from 100.9.

– St. Louis Fed President James Bullard will speak today.

– Wayfair and Foot Locker will release earnings before the bell today.

– Check back on Monday for details on weekly economic numbers and earnings releases.

 

You can view all of my past notes, charts, and calendars at my blog here:   https://www.siebertnet.com/blog/

You can sign up to have all of these delivered to you daily by entering your name and email address on the form at the top of the page.

daily chartbook 2020-02-28