Market Overview

Quick Correction: Market Takes Just 48 Trading Hours To Reverse Rally

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The market continues to veer toward craziness, and now it’s in correction territory as volatility screams dramatically higher. Still, investors have to be careful not to run around with their heads on fire. Remember, many market professionals had warned a correction was due. The problem was, it happened in just 48 trading hours.

Whatever happens over the next trading day or two, there’s likely to be a longer-term shakeout. We could see two to three weeks of odd trading, and that means investors need to take special care. When going in for trades, it’s important to know the time frame, and to understand that short trades are exposed to more volatility. The huge jump in VIX from under 10 a month ago to around 50 now arguably says a lot about the current state of market anxiety, but one thing to keep in mind is that in recent years, sharp jumps in VIX typically haven’t had staying power. We’ll see if this turns out any differently.

There’s no sign of an end to the roller coaster ride, as volatility surged to new two-year highs early Tuesday before the opening bell. That means investors might want to mentally prepare for another day of potential sharp swings. However, it’s interesting to note that what arguably scared the market most — a spike in bond yields — has eased considerably over the last 24 hours.

The 10-year yield recently traded at 2.73%, down from four-year highs above 2.88% Monday. Borrowing costs remain on the low side historically, and it looks like investors may be buying bonds in a “flight to safety” type of move as stocks gyrate wildly. The U.S. Treasury is set to auction $15 billion in four-week bills and $30 billion in 70-day bills, in addition to an auction of $26 billion in three-year notes. The results of those auctions could be worth watching.

The U.S. flu spread to Europe and Asia overnight, with stocks in Germany and Britain falling 2%, Japan’s Nikkei down nearly 5%, and Chinese stocks down 3% to 5%. Another overnight development was some confusion in the products that trade volatility. Sometimes weakness in products can come out at stressful times like these and that can cause another ripple, which could help explain the volatility spike this morning.

Anyone looking for Fed response to the Wall Street woes might end up disappointed. There aren’t any Fed speakers scheduled today, but new Fed Chair Jerome Powell is now in the driver’s seat. Some analysts argued that aspects of this plunge might have to do with concerns about Powell taking the reins from former Fed Chair Janet Yellen, whose policy views and commitment to gradual rate hikes were well known. However, the sense is that Powell comes from the same school of thought.

From a point-loss perspective, the market’s performance Friday and Monday was the worst in history. Still, percentages mean more, and from a percentage standpoint, the 4% loss Monday in the broader S&P 500 (SPX) wasn’t even steep enough to make it into the list of top-20 worst percentage days in Wall Street history. The raw numbers mean a little less these days since they’re so much higher.

The temptation might be to crawl under a rock and cover your head, but investors should consider doing their homework and looking for specific sectors or stocks that may have overshot the mark to the downside. If you’ve had your eyes on something, but previously couldn’t justify the price based on the fundamentals, this might be the opportunity.

Keep in mind some of the following fundamental factors, none of which are any different after the wild action on Wall Street Friday and Monday:

  • Earnings season has been going mostly well. Although some big companies have disappointed, the number of companies beating Wall Street analysts’ consensus estimates had been trending above average through last week.
  • Analysts expect double-digit earnings growth once again this year.
  • Company outlooks have been mostly positive, with many executives expressing optimism about the growing economy and the possible bullish impact of tax cuts.
  • The economy grew 2.6% in Q4 after growing more than 3% the previous two quarters. This could be a sign that growth is returning to historic norms after a long sluggish period.
  • Job growth is solid, and unemployment remains near 20-year lows. Consumer confidence measures are high, and wage growth is finally picking up. This could mean better consumer demand in coming months.
  • European and Asian economies are generally on the upswing.
  • Interest rates remain historically low, meaning borrowing costs are still restrained even if they’re up a bit from the generational lows we saw in 2016 and 2017.
  • The U.S. dollar has weakened over the last year, making U.S. products potentially more attractive to foreign consumers.
  • Oil prices, while much higher than they were two years ago, remain at a moderate level where the cost of gas isn’t a major headwind for the economy.

It’s a long list, and maybe worth cutting out and keeping in your wallet to review if there are more days like Monday. A psychological change like the sort we’ve seen develop over the last week can sometimes mean the market seems to ignore fundamentals for a while, but that doesn’t mean investors should, too.

There’s really nothing the ordinary investor can do about a psychological change in the market, nor is it possible to say how long it might last. Over the last few months, many market professionals urged investors to check their allocations and make sure they were comfortable with the amount they had in stocks. Hopefully, many people listened.

Even if you are someone with a large stock position and haven’t adjusted it or taken any profit on the way up, consider the fact that stocks remain up more than 15% over the last year. Basically, the last two sessions have wiped out the previous two months of gains, but very few investors were feeling that bad about where the market was as of the start of December.

This doesn’t mean things will necessarily come back quickly. No one knows how long a move like this might last, nor are there any guarantees against further losses.

chart_2_5_update2.jpg
FIGURE 1: THE STOCK INDEX AND THE VIX This intraday chart for Monday shows the S&P 500 Index (SPX) falling most of the day and then cratering late in the session as the VIX (purple line) moved up to two-year highs. The big swings in stocks and the jump in volatility seemed to play off each other during the session’s last hour. Data sources: Standard & Poor’s, CBOE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Infrastructure Still Under Construction

One thing that might have weighed a bit on the market last week was the fact that in his State of the Union speech, President Trump really didn’t give much more detail about his infrastructure plan. Many investors have been waiting for a long time to get a sense of how the plan might work and its potential impact on sectors like materials and industrials. Even the technology sector might get a boost from a major infrastructure plan, because so much of construction today depends on advances in technology. The lack of a real focus on infrastructure in the speech might have taken a little wind out of the market’s sails, though it wasn’t necessarily one of the main reasons for the recent plunge.

Sector View

No sector escaped pounding over the last five days, but some got hit a lot worse than others. For instance, some of the worst performing sectors in the five sessions including Monday’s were energy, materials, health care, and info tech. Faring slightly better were telecom, utilities, and real estate. It might seem a little odd to see health care among those hurt the worst, but that could reflect some concerns about the proposed team-up announced last week by Amazon.com, Inc. (NASDAQ: AMZN), Berkshire Hathaway Inc. (NYSE:BRK.A), and JPMorgan Chase & Co (NYSE: JPM) that shook up the health sector even before the rest of the market really turned tail. Otherwise, things look as you might expect them to at times like these, with dividend-yielding sectors generally performing better than growth. Speaking of dividends, energy can get overlooked as a dividend producer, but sometimes people do buy energy stocks as part of a dividend strategy due to their strong yields, and that might give the sector some support.

Living in the Past

If we’re in a “typical” market pull back, how long could things take to recover and how deep could the losses go? While history isn’t gospel and there’s no guarantee of the past repeating, analyst Sam Stovall of CFRA dug through the numbers and found that this is the 57th bull market decline of 5% to 9.9% since World War II. The previous 56 have declined an average of 7% and taken 38 days to complete their downward move, with only 46 more days required on average to get back to even. The round trip from top to bottom and back to break even has averaged 84 days (or less than three months).

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Posted-In: JJ Kinahan TD Ameritrade The Ticker TapeNews Commodities Federal Reserve Markets

 

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