Another Wild Wednesday: New Quarter, Same Old Sell-Off As Fears Of Crisis Intensify

Meet the new quarter; same as the old quarter. The silver lining is that the ugliness isn’t quite as ugly as in the recent past.

Hopes for a “V-shaped” recovery took a blow Wednesday as April opened and last week’s rally went up in smoke. Major indices gave away a decent-sized chunk of their recent gains, but maybe there’s solace in seeing the market avoid another limit-down plunge.

The selling began early both overseas and in U.S. futures markets, then gathered steam once the U.S. session began. There was a brief comeback attempt at mid-morning, but it couldn’t find traction and got stamped out quickly. President Trump’s warning yesterday about a tough two weeks ahead and the potential for a U.S. death toll in the six figures likely intensified peoples’ worries and played into Wednesday’s selling. 

Another concern is that this crisis could go on longer than people had originally expected. The White House now says social distancing needs to last until April 30, when previously there was hope of a mid-April reprieve. Stocks are repricing to a new reality as investors are now looking ahead at an entire month, at least, of significantly reduced economic activity. 

April’s Open Brings Some Green Shoots

Despite April’s dismal open, positive signs are out there like little green buds on some of the trees. First, there was no dive to limit losses for the S&P 500 Index (SPX) either overnight or today, the way we saw a couple of weeks ago.

Meanwhile, crude recovered throughout the day and stayed above $20 a barrel. The 10-year Treasury yield managed to find a little life after falling below 0.6% early on.

Volatility remains elevated, but the Cboe Volatility Index (VIX) stayed below 60 after threatening that level early in the day. The way the VIX hasn’t rebounded back toward the 70–80 levels seen in mid-March could be a hint that the market is working to get back to some ranges where trading might be more normal. Today’s sell-off was pretty orderly, without signs of panic selling.

All that said, uncertainty is sky-high, and when investors don’t know what’s next the first reaction is often to sell stocks and buy what they see as risk protection in fixed income and volatility. The pressure accelerated in the last hour of trading Wednesday as major indices fell more than 4% to their lows for the day. The small-cap Russell 2000 Index (RUT) continued to take it on the chin, down nearly 7% as investors seemed concerned about how regional banks can weather this crisis. 

The RUT was actually the only major index to fall the limit Wednesday. Some regional bank stocks fell double-digits, and their bigger cousins like Bank of America Corporation BAC, Wells Fargo & Co. WFC, and JP Morgan Chase & Co. JPM didn’t have much luck, either.

Grocery Trip

There were some shining stars Wednesday among the same Consumer Staples companies whose stocks have been among the stalwarts since this all started. Those include Costco Wholesale Corporation COST, Procter & Gamble PG, Walmart Inc. WMT, and The Clorox Company CLX. Outside of that, it was ugly, with tech and Communications Services getting taken out to the woodshed in a way we haven’t seen in a while. 

Bonds rallied pretty significantly, crushing interest rates and putting Financials under more pressure. That sector is really hurting from the combined weight of low rates and the prospect of business activity keeping the brake pedal pressed to the metal.

The market got a little reprieve last week and now it’s starting to do some repricing as forward earnings estimates started to crater. The market seems to be pricing in an earnings recession.

After major indices hit lows for the day with about half an hour left in the session, there was a slight improvement over the last 15 minutes. Sometimes this can bleed into the futures market and even into the next day, but that hasn’t always been the case lately.

As VIX Approaches More “Normal” Levels, Footing Could Improve

A lot of investors want to know if major indices are going to retest the lows. No one knows, but the fact that VIX is staying down near more normalized levels could hint that this down-move is maturing. It’s absorbing bad news with less fear and not reacting like before. Things could turn more negative, but the way the market is absorbing data allows people to make a stronger argument that maybe the lows might hold.

As far as data, some of it this week didn’t look as bad as some analysts had expected. The ISM manufacturing index for March released Wednesday posted a headline read of 49.1, way above the 43.3 consensus from Briefing.com. Chicago PMI and consumer confidence out yesterday both topped expectations. The bad news came in the form of an unexpected contraction in February construction spending and a huge weekly crude supply build. 

There’s a lot more data coming down the pike in the next few weeks, none perhaps bigger than Friday morning’s March payrolls report. It’s expected to show job losses of 150,000, according to the Briefing.com consensus. Before that, investors face initial jobless claims tomorrow morning after the previous report broke every record in the books.

Those numbers might get worse in coming weeks and months, but the market tends to be forward-looking. That’s why guidance this coming earnings season is so important. Big banks kick things off the week of April 13.

CHART OF THE DAY: STRESSES IN THE LENDING MARKET. The action in the U.S. dollar ($DXY-candlestick) could be a reflection of the pressure banks and lenders could be experiencing. The dollar is bouncing off between support and resistance of the 61.8% and 50% Fibonacci retracement levels. Any economic data such as jobless numbers could impact the greenback’s performance. Something to keep an eye on would be if it breaks out above or below these significant retracement levels when the numbers are released. Data source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade.