12:25 PM EDT
September is certainly living up to its reputation as a most difficult month on Wall Street. To wit, after a nifty start to this 30-day span with gains on the first two trading days of this month, the tide has turned and rather quickly, with this morning's bearish action just the latest setback for the bulls.
Today's retreat, which came to 815 points in the Dow Jones Industrial Average, as the noon hour arrived on the East Coast, was most pronounced in those blue chips. There also were major selloffs in the S&P 500 Index, the tech-laden NASDAQ, and the small-cap Russell 2000 Composite.
Behind this sharp downturn, which at one point had hit 900 points in the Dow, were worsening data on the COVID-19 pandemic in much of Western Europe, with France and the UK being especially hard hit with mounting infections.
The setback was also broad, with decliners ahead of advancers by more than 10 to 1 on the Big Board. Bank stocks were particularly hard hit today, as were cruise ship operators, and the airlines. It would not seem, at least at this point, that a meaningful afternoon comeback will get under way.
– Harvey S. Katz, CFA
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The month of September, which started out on a tranquil note and with the major equity averages at or near record levels, has thus far proven to be highly volatile one for those long equities. At first blush, Wall Street pundits brushed the selling off as some profit taking, propelled by frothy valuations in the technology sector. However, as the month has progressed, more factors have been blamed for the selling, which at times has been quite considerable. There have been a lot of unanswered questions for the investment community to ponder in recent weeks (more below), and that is causing investors to exit out of some of their riskier positions.
Last week proved to be a rollercoaster ride for investors. The market rallied over the first few sessions, with some major M&A news last Monday and hopes for a coronavirus vaccine pushing the major averages higher. Then after a relative uneventful morning session last Wednesday, the bears emerged following the Federal Reserve’s monetary decision Wednesday afternoon and the central bank’s continued tepid outlook about the recovery of the U.S. economy. The lead bank says that it anticipates keeping short-term interest rates at historically low levels through at least 2022. The uninspiring outlook unnerved investors that continue to face a “wall of worry” on Wall Street. For the five-day stretch, the major equity indexes delivered a mostly mixed performance. The Dow Jones Industrial Average and S&P 500 Index were none too far removed from the neutral line, while the NASDAQ once again finished in negative territory, with continued selling in the technology space the main culprit.
Our sense is that the recent uptick in volatility will continue, especially with the start of third-quarter earnings season still several weeks from commencing. Absent of news from Corporate America, investors, as noted above, face what we think constitutes a “wall of worry”. The uncertainty surrounding the forthcoming elections in November and the impact the results will have on the U.S. stock market, the inability of the White House and a divided Congress to agree on a new stimulus plan to boost an economy that earlier this year was devastated by the coronavirus pandemic, and the emergence of some cracks in the ongoing recovery in U.S. output are worrying investors. And reports that the Trump Administration and the Republican-led Senate plan to proceed with appointing a candidate to replace the Honorable Supreme Court Justice Ruth Bader Ginsberg, who succumbed to her battle with cancer on Friday, will likely add to the contentious feelings on Capitol Hill. That environment would not be ideal for getting another round of economic stimulus measures passed, and may prompt some more “flight to safety” on Wall Street in the coming weeks and months.
So what should an equity investor do right now? The first answer should be to keep a good percentage of their portfolios in equities, as the accommodative monetary policy in place will likely continue to provide ample downside support for stocks. For those unwilling to fight the Fed, we recommend that investors give a close look at stocks ranked 1 (Highest) or 2 (Above Average) for Safety in our Value Line ranking system. Historically, these stocks have outperformed the broader market during turbulent and volatile stretches for the market, which we are in the midst of right now. Value Line subscribers can access an updated list of these stocks this morning on www.valueline.com.
From a sector-specific perspective, the technology names remain under near-term selling pressure, but need to be closely monitored as the recent notable profit taking may present some more attractive entry points for those with a longer-term investment horizon. Our latest review on many of the big technology names from the semiconductor, semiconductor equipment, and computer and peripherals industries, can be found this week in Issue 7 of The Value Line Investment Survey. Meantime, we think the banking stocks will continue to face an uphill battle, as the Fed’s recent decision to keep rates at historic lows will hurt the earning power of the lending institutions.
Before the opening bell, the equity futures point to some heavy selling when the U.S. stock market opens. The global selloff (the main indexes in Asia finished lower overnight and the European bourses are notably weaker as trading moves into the second half of the session on the Continent) is being driven by concerns that the growing tensions on Capitol Hill could potentially bulldoze any possible coronavirus-driven economic stimulus packages that are needed to support an economic recovery that is showing some recent signs of slowing. The pessimism among investors is clearly evident in the continued “flight to safety” on Wall Street. The yield on the 10-year Treasury note, which moves in the opposite direction to the price, is falling this morning, as investors gobble up fixed-income securities. As noted above, we think an investment strategy that focuses on stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line is a sound way for those looking to stay invested in equities when market volatility picks up. Stay tuned.
– William G. Ferguson
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
