Before The Bell
The most recent five-day stretch of trading saw a pickup in volatility, not seen since the end of March when the U.S. equity market was rocked by worries about the outbreak of the coronavirus stateside and the health and economic implications it would have on the homeland. The latest bout of volatility was stoked by what Wall Street deemed to be dour comments from the Federal Reserve about the state of the U.S. economy (more below). That, along with data showing a larger-than-expected spike in initial jobless claims and reports that COVID-19 cases have risen in many states that have reopened their economies, emboldened the bears, as investors quickly took profits in a market that may have come too far too fast; the NASDAQ Composite finished above the 10,000-point mark for the first time in its history last Wednesday. For the week, which made for the worse performance foe equities in three months, the Dow Jones Industrials, the NASDAQ Composite, and the broader S&P 500 Index were down 5.6%, 2.3%, and 4.8%, respectively.
The main news story that unnerved investors was commentary on Wednesday afternoon Fed Chairman Jerome Powell after the central bank decided to hold interest rates at near-zero. Specifically, Mr. Powell said that the U.S. economy’s recovery from the ongoing deep recession will likely take longer than many market watchers were hoping for in recent weeks. He also said that the lead bank will likely keep rates at current levels for a few more years and the economy may not recover fully until 2022. As noted, those comments ratted investors, as the Dow 30 fell 1,862 points on Thursday. That selloff was followed by a partial rally on Friday, but it was a volatile session, nonetheless. The week’s final session saw the Dow climb more than 800 points, but then gave back all of those gains and then some, before rallying anew into the closing bell. Despite Friday’s partial rebound—the Dow 30, NASDAQ, and S&P 500 added 477, 96, and 39 points—there was a clear late-week move out of riskier stocks and into fixed-income and some of the more defensive equity names. Not surprisingly, given the central bank’s dour commentary, the financial and energy stocks were the biggest laggards on Wall Street last week. As we have mentioned here several times this year, during turbulent markets, which was the case late last week, investors should look at stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line. Those issues have historically performed well during volatile times. Investors should note that the CBOE Volatility Index (or VIX), also known as the “fear gauge,” spiked 47% last week and is again moving notably higher this morning.
Turning to the new week, our sense is that the big news driver for Wall Street will be the coronavirus and particularly whether COVID-19 cases are spiking in areas that have aggressively reopened their economies. Investors believe that if cases increase and regions are again forced to shut down, it would be a devastating situation for Main Street and Corporate America. With second-quarter earnings season, which many expect to be a train wreck for Corporate America, still more than three weeks from commencing, the news from the business beat will again be in Wall Street’s focus. We will get reports on retail sales and industrial production (tomorrow), housing starts (Wednesday), and unemployment claims (Thursday). Each of these releases has the potential to move the market, as they will provide clues as to how the U.S. economy is doing. The consumer, housing, and manufacturing combined account for most of the nation’s economic output.
And on point, before the market’s open, the U.S. equity futures pointed to some heavy selling. The major European bourses are all down more than 1%, as trading moves into the second half of the session on the Continent. The continued nervousness in the market, which will likely see the major equity indexes turn negative for the first time in June at the midway point of the month, is being driven by worries about a second wave of the novel coronavirus, as states reopen their economies and commerce activity and traveling increases. As noted, there is a notable shift right now from riskier assets to more safe-haven holdings. The yield on the benchmark 10-year Treasury note, which moves opposite to the price, continues to drop, as investors around the globe again start to gobble up bonds. From an equity perspective, we expect the financial, energy, retail, manufacturing, and homebuilding stocks to remain in the crosshairs of Wall Street, as worries about COVID-19 and its implications on the economy is again the main theme on the Street this week. 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.
