Stocks tried to bounce last week as markets obsessed over the spread of coronavirus.
The S&P 500 at one point was down as much as 1.8 percent, but rallied late on Friday to close up 0.6 percent. It followed the worst week since 2008 and kept the index below 3,000. The entire rally following President Trump’s trade deal with China has now disappeared.
Covid-19 is the sole reason for all the carnage. Despite there being only 233 confirmed U.S. cases on Friday, investors expect many more as testing widens. The result will almost certainly be less travel, less shopping and less consumption.
Here are three big examples of how the market is expressing that fear now.
Interest Rates Are Totally Out of Whack with the Numbers
Interest rates are the biggest indicator of what’s going on. Bond yields have fallen to their lowest levels ever as investors safeguard their capital and look for the Federal Reserve to cut interest rates again.
The Fed started last week, slashing its target rate by 50 basis points on Tuesday morning. CME’s FedWatch tool now shows a consensus view that policymakers will chop another 75 basis points on March 18.
These numbers are truly bizarre when you consider the real economic numbers. Non-farm payrolls swelled by 273,000 workers last month, crushing forecasts by almost 100,000. The service sector also had its strongest month in a year. That puts the first quarter on pace for economic growth above 3 percent, according to the Atlanta Fed.
Normally people would look for higher interest rates given such a situation. But those numbers are all based on the past. Now all the focus is toward the future with travel restrictions because of coronavirus.
This Handful of Stocks Is Climbing
A handful of companies have risen lately because investors think they will benefit from the spread of coronavirus. Here’s a quick breakdown:
- Consumer staples: Americans are stockpiling basic necessities like canned food and paper towels. That’s lifting names like Campbell Soup (CPB), Costco (COST), Kroger (KR) and Kimberly Clark (KMB)
- Vaccine stocks: The U.S. government has allocated at least $300 million to develop a coronavirus vaccine. Key movers include Inovio Pharmaceuticals (INO), Gilead Sciences (GILD) and Moderna (MRNA).
- Telecommuting stocks: Suddenly everyone’s working from home. Zoom Video Communications (ZM) has benefited from this trend. Ditto for Citrix Systems (CTXS), which also had a strong quarterly report in late January. Keep an eye on Slack (WORK) earnings Thursday afternoon.
Oil and Airlines Are Both Crashing
Crude oil ended last week with its biggest selloff in years after OPEC and Russia failed to agree on new production cuts. Inventories also increased unexpectedly.
Throw on top of that reduced economic activity in China and less travel. Suddenly oil was testing its lowest levels since at least 2002.
Normally cheap energy is good for airlines because of their fuel costs. But this time they’ve led a selloff in the entire transportation sector.
Banks and financials were the other big decliners last week because of the low interest rates.
Utilities, consumer staples and healthcare were the best performers. Health insurers in particular surged after former Vice President Joe Biden scored big primary wins on Super Tuesday. That reduces the odds of industry-foe Bernie Sanders being the Democratic candidate for President.
The Importance of Having a Plan
Planning can be more important than ever at volatile times like now. One reason is to control emotions. Another is because the big swings create opportunities for either long or short positions. But traders may find they need to prepare and carefully study levels whichever direction they favor.
Also remember that markets price in news before it happens. Right now, it’s looking for a much weaker economy. But those kinds of fears can suddenly evaporate and trigger a violent rebound — especially if news doesn’t turn out to be as bad as expected.
Finally, investors might want to keep an eye on homebuilders. Mortgage rates are near their lowest levels ever and there’s a shortage of new inventory. Recent data like housing starts has also shown the market coming back to life.
This week’s calendar is relatively quiet, with few major economic events or earnings reports. But it could still be eventful as investors react to breaking news on the disease. Governments and central banks may also respond to the crisis unexpectedly.