Crude Oil, Dollar Index In Focus As Market Weighs Global Stimulus Efforts

Anyone hoping volatility might ease because things didn’t go limit-down in futures trading Thursday probably didn’t watch things carefully enough. We’re not out of the woods.

Stock index futures had a crazy overnight move, trading in extremely wide ranges. Overseas, South Korean stocks plunged 9%, with aviation getting hammered. Australia said they’d take drastic measures to prop up their economy. The Fed acted to help money market funds, and the European Central Bank is buying bonds.

The South Korean weakness is probably what drove U.S. futures down as investors sought clues from that country, which has been hard hit by the virus. The Cboe Volatility Index (VIX) is pointing higher again this morning and isn’t budging from near-record peaks.

Quadruple witching is tomorrow, and scarily enough, that could make things even crazier today (see more below). We’ve been warning people about keeping trade sizes low all week, and we’ll do it every day because these are unparalleled moves and unparalleled times.

On the bright side, crude prices climbed about 8% this morning from the 18-year lows posted yesterday. It’s still possible they could fall further, but hopefully they’re finding some stabilization. We’ll have to wait and see. 

Also, bonds and gold moved a little higher Thursday morning, which is more what you’d expect at times like this. Their downward moves the last few days could have reflected investors selling whatever they had in a run toward cash.

It appears some investors have decided to simply step out, take their cash, and re-assess from the sidelines. Many investors seem to basically be saying, ‘I may take some losses here, but if I have cash I can deploy it when I know more.’ 

The problem really is we just don’t know anymore. And until we really know where things are at, you may see people who just want to have as much cash as possible. That’s one theory behind yesterday’s sell-off

A Smattering of Earnings

On the bright side, Accenture PLC ACN beat analysts’ earnings estimates pretty well and had a good forecast. Like other companies, however, ACN said it isn’t sure how the virus situation might affect its business over coming months.

Homebuilder Lennar Corporation LEN also reported Thursday and said it’s struggling to understand the impact of the crisis on its business. “With a near shutdown of large portions of our national economy, we are all stretching our minds to understand the parameters of the rapidly evolving landscape, while we contemplate what the future holds,” LEN said in its release.

The company’s press conference could be worth checking out for a sense of measures LEN is taking to keep its business running and any ideas it may have about the impact on housing demand.

Data Dependent

It’s been pretty evident for a while that the virus eventually is going to likely have a big negative impact on data coming in. Not all of this will necessarily be picked up by the March payrolls report, but it’s coming. 

For instance, today’s weekly jobless claims report showed claims climbing steeply to 281,000 from recent readings under 220,000. This is probably the best place to get a finger on the pulse of the job market until early April when the monthly payrolls data show up. 

More than 3,600 people, most of them from entertainment and leisure industries, have been laid off in the U.S. due to the pandemic, according to Challenger, Gray & Christmas Inc., an outplacement firm. That doesn’t include job cuts at bars and restaurants in more than a dozen states and some cities that face restrictions on operations. The Challenger report said up to 9 million leisure/hospitality jobs could be in jeopardy due to the virus. 

Energy is another industry that could face job weakness in coming weeks and months (see more below).  Airlines and hotels also come to mind, with one media report saying the U.S. hotel industry is reporting 10% occupancy.

Another data point that investors may want to monitor is the number of U.S. coronavirus cases, which climbed above 9,400 today. That number keeps growing pretty quickly, but if it starts to slow, people might get a sense that all these drastic measures are starting to work. That would likely be seen as positive for the markets. We can only hope. 

Meanwhile, major financial forecasters are starting to assess the possible impact on U.S. economic growth. JPMorgan Chase & Co. JPM lowered its gross domestic product (GDP) estimates for the first two quarters to -4% and -14%, with a jump of 8% in Q3 expected. So basically, JPM predicts a recession (defined as two quarters in a row of negative GDP).

If JPM is right and Q2 does fall by 14%, that would be far more severe than the worst quarter of the 2008 financial crisis.

How to Approach this Market? Gingerly

As we noted yesterday afternoon, this is a very dangerous market to venture into and arguably should only be traded in small increments, possibly by scaling in and using dollar-cost averaging. It very well might get worse before it gets better. Try and keep your composure, even if it’s hard to do.

Anyone taking a new position should probably consider widening their levels with this high volatility. Swings are likely to stay dramatic for a while. Widening levels means expecting things to move higher or lower more sharply and quickly than normal, so be aware of what you’re comfortable potentially losing and the duration you’re thinking about. If it’s for the long-term, be ready to suffer a little now and keep your eye on the ultimate destination.

Now might be a good time to consider your investing time horizon and risk tolerance. That’s why you might want to think iteratively—meaning small pieces of your portfolio. Decisions made out of fear or greed typically don’t turn out so well. 

If you feel you have to sell shares in these times, consider keeping it to small amounts. Having some cash on the sidelines isn’t necessarily a bad idea. However, if you can take a long-term view, this could be one of those times where it might help to keep things in perspective.

CHART OF THE DAY: DOLLAR’S RALLY MAY HAVE LEGS. The U.S. Dollar Index ($DXY–candlestick) has broken well above its uptrending channel (yellow parallel lines) after a quick reversal from its March 9 low of 94.65. In light of recent measures taken by central banks and governments, dollar funding is a pretty big issue globally. As a result, demand for U.S. dollars has increased, sending $DXY toward its previous high of over 103 in December 2016. Data source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Witch Watch: Though this week’s Fed meeting has been canceled, other things go on. That includes quadruple witching this Friday. It almost got lost in the shuffle, but Friday is the third Friday in March, meaning it’s one of four days a year (once a quarter) when contracts for stock index futures, stock index options, stock options, and single-stock futures all expire. Traditionally, markets tend to see elevated volatility around these days, although volatility is already so high it’s hard to believe it could get any choppier. One thing some economists are wondering is whether volatility might relax a bit next week after witching is out of the way. That probably would be welcomed by many investors, but we’ll have to wait and see. 

Why Doing Nothing Might Not Be So Bad: We know it’s irritating being told to hold onto your stocks if you’re a long-term investor in these uncertain times. No one would be faulted for selling some shares now if they feel the need to have a bit of cash on the sidelines. One argument for holding on, however, is quite simply this: “Dollar-cost averaging.” This means getting into a stock or the market as a whole at various price points. 

That doesn’t mean you have to lift a finger now or worry about making any moves in this volatile market. Just being in the market could be enough. For instance, if you invested in dividend stocks and chose to reinvest dividend payments, or if you’re automatically buying shares in your retirement account, you’re taking advantage of cost averaging and may not even realize it. Let’s say you’d bought a stock at $300 a share back in January, and it’s now $150 a share. Ouch, right? Yes, but not necessarily as catastrophic as it might sound. Remember, your dividends or retirement fund are now reinvesting at the lower price. Assuming stocks eventually come back (and they have from every previous bear market, though past performance holds no future guarantees), you’ll have made many purchases at the very depths of the downturn. That could potentially mean you’re positioned for better returns many months or years from now if you do one thing: Hold on.

1995 Again for Natural Gas: There’s a lot of talk about new lows today. The lowest level for the S&P 500 Index (SPX) since late 2018. The lowest for the Dow Jones Industrial Average ($DJI) since 2017, and the lowest for crude since 2002. However, there may be nothing as low as natural gas (/NG). This commodity had already been beaten up badly by massive supplies before the virus smashed the rest of the energy market, but it probed new depths Wednesday. Front-month natural gas futures crashed below a long-term technical support level at $1.61 per million British Thermal Units (mmBtu) to hit $1.59 by midday, the softest level since September 1995. Almost a 25-year low.

Why should a typical investor care, assuming they don’t have too much of their portfolio in the Energy sector? Well, trade publication OilPrice.com reported there were 10 liquefied natural gas projects in the U.S. slated for approval last year, but some might be canceled if the price situation doesn’t improve soon. Projected costs for each of these projects are well into the billions of dollars. If they don’t get done, that’s another potential hit to many jobs in the energy patch, as well as less chance for an economic boost to parts of the country where the work would take place. Think Texas and Louisiana. These sorts of stories help investors see the real-life consequences of lower prices not just for energy, but potentially in other sectors as well.