Slippery Argument

Slippery argument.  Stocks fell on Friday as Coronavirus fears continue to grip the markets. Crude oil fell along with the energy sector as the Saudis failed to make a deal with the Russians on supply cuts.

 

N O T E W O R T H Y

 

Don’t be a hero.  Stocks had a crazy five sessions in the past week, never mind bonds.  The swings in the major indexes in both directions were enough to give even the most seasoned traders a bit of nausea. Interestingly, stocks ended closing up slightly for the week. Really.  In the heat of volatility it is difficult to see what is really happening so here is a list of things that I think are important to note. * The Coronavirus is just beginning to spread in the US and the rest of the world.  Cases and deaths will continue to grow which will most likely cause more mandatory quarantines. Additionally, many consumers will avoid unnecessary travel and entertainment to avoid social contact.  This will most certainly have an effect on airlines, cruise lines, entertainment industry (think concerts and movies).  It will also affect retail (think malls) and small businesses that rely on conferences and tourism (think about the postponed South by Southwest conference). * The US economy was in good shape going into the outbreak.  All of the economic numbers we have been receiving indicate that hiring continues, unemployment is low, prices are in control, and consumers are generally confident about the future.  Most of those indicators are based on data through February, prior to the first quarantining in the US.  Last Friday’s employment numbers showed low unemployment (3.5%) with +273k new jobs added, both beating expectations. The numbers to watch closely will come next month.  * There is a chance that the US can enter a small technical recession later in the year as a result of slower growth.  A technical recession is when GDP has negative growth for two consecutive quarters and with GDP growing at just +2.3%, you can see how that might be affected by a slowdown in consumption.  The good news is that it will most likely be mild and short lived.  The virus will be contained and consumers will get back to the movies, malls, and vacations which will turn around corporate performance possibly as soon as 1Q21.  * Right now, the equity markets are responding to headlines in an emotional way with indiscriminate buying and selling.  There is some rational selling in sectors that are clearly being impacted by lower demand resulting from the virus.  As the spread of COVID-19 is just beginning in the US, there is likely to be continued pressure across the board until things start to settle down and possibly start to improve.  By that I mean when the growth of new cases starts to slow down, as it has in China.  Dip buying, which has been the mainstay of stock picking do-it-yourselfers for the past 10 years, may not be the best strategy right now.  This is a good time to re-asses your portfolio.  If you are within five years of retirement and the past several weeks of market volatility have you nervous, your portfolio is too risky and you should get help from a professional to adjust your risk.  If you are a longer term investor and you are comfortable with the volatility, you will be ok.  The majority of a stock’s value comes from earnings which will be had beyond a year out and the virus along with its negative effects will likely be diminished in that timeframe.  For now, it is probably a good time to stay in touch with your advisor and stick to a core investment strategy.  Don’t be a hero.

 

Keep your head low.  Many investors tend to hold on to stocks that performed really well in the past and which have racked up large gains only to watch those gains go away as a stock or sector falls out of favor.  An obvious example is the energy sector which has been under pressure for the past several years.  It had a nice run-up in the wake of the financial crisis through 2014 paying solid dividends along the way.  Many investors made great returns on well-known stocks in that period. The industry fell in 2015, traded sideways through 2018, and has been falling ever since.  There are many factors that are causing this with the high level drivers being: increased supply as shale oil entered the market and traditional drilling has become more efficient, OPEC’s loss of control over prices, and ESG investing has caused many endowments and pension funds to diminish their fossil fuel holdings.  The Coronavirus has slowed crude oil demand with China slowing down manufacturing which has been compounded by a global slowdown in air travel.  Demand has also been hampered by climate.  With warmer temperatures natural gas and heating oil have also been impacted.  Now onto the nasty stuff.  Last week OPEC and Russia spent a week in Vienna eating Sacher Torte, Strudel, and Wiener Schnitzel (all family favorites) while discussing the need for additional production cuts to shore up prices in response to the virus-based demand slowdown.  Reluctant Russia ultimately did not agree to the cuts which caused the price of crude oil to drop by -10.07% on Friday, taking the energy sector along with it.  WHILE YOU SLEPT Saudi Arabia went on the offensive announcing that they will increase production and offer discounts to customers pushing the price of crude down by as much as -34% last night.  Why would they do this?  To inflict pain on its rivals.  It costs Saudi Arabia roughly $9 to produce a barrel of crude oil while it costs Russia around $19 and US shale producers $23.  With crude trading at $31.75 now, margins have slimmed down quite a bit since last Friday when prices were $10 higher.  It is clear that the energy sector is in a period of transition, which means household names like Chevron, Exxon Mobile, BP, and Royal Dutch Shell will need to adapt to the changing business climate. Until they do, volatility will continue to haunt the sector. Investors would be wise to remain cautious about the sector until things turn around.

 

THE MARKETS

 

Stocks traded down on Friday on continued Coronavirus fears despite a solid reading on jobs in the US.  Investors continue to rush into treasuries pushing yields even further into uncharted territory.  The S&P500 traded down by -1.71%, the Dow Jones Industrial Average slipped by -0.98%, the Russell 2000 dropped by -2.00%, and the NASDAQ Composite Index gave up -1.87%.  Bonds soared and 10-year treasury yields fell by -14 basis points to 0.76%.  The markets, spooked by falling crude prices, are down significantly overnight.  Equity futures have hit circuit breakers and are pointing to a difficult open and crude oil futures are down significantly but off their lows.

 

NXT UP

 

– The week ahead is light on economic numbers.  We will get figures on inflation and University of Michigan Sentiment amongst others.  Several notable companies will release earnings this week as well.  See the attached economic and earnings release calendars for details.

– Pay close attention to the Administration this week.  Larry Kudlow announced plans to offer some sort of stimulus package soon.  This would be welcomed, if not scrutinized, by the markets.

daily chartbook 2020-03-09

econ numbers 3_09

earnings releases 3_09