Financials, Energy Among Worst-Hit Sectors In Biggest Single-Day Selloff Since March

(Thursday Market Close) Time to take a breath. 

Sure enough, we’re seeing a correction here in the second week of June, and a lot of it has to do with COVID-19 cases surging in a few reopened states. Back about a month ago, we’d pointed out that mid-June might be a time of reckoning because we’d start to see the impact of a reopened economy. Signs of possible virus resurgence in Florida, Arizona, and Texas this week caused some fears about whether businesses can get going.

Profit taking surfaced in a major way today in a pretty amazing selloff that basically wiped out most of the month’s gains. Things got worse as the closing bell approached and the S&P 500 Index (SPX) approached the 3000 level, this time from the opposite direction than we saw late last month when everything was going gangbusters.

Energy and Financials took the hardest hit Thursday (see chart below), and selling put a lot of pressure on travel stocks, too. It would take too long to list all the companies that saw investors scramble to pull some money out over the last eight hours. However, if you get airsick easily, maybe it’s not a great time to glance at the airline sector. Same goes if you get seasick and feel like checking out the cruise stocks.

The scoreboard for Financials and Energy showed losses of more than 8% and 9%, respectively, for those two sectors. Most of the other S&P 500 sectors finished with session losses of 4% to 6%.

Crude oil—often seen as a harbinger of stronger or weaker economic activity—took a 9% haircut today and is back near $35 a barrel after flirting with $40 earlier this week.

CHART OF THE DAY:  SECTOR LAGGARD-BOARD. It’s hard to point to a leaderboard on a day like today, when the best performing sector (Staples) fell a mere 3.8%. At the other end of the spectrum—call it the “laggard-board”—Energy (IXE—purple line), which had been on a serious comeback run after the recent bottom-out and rebound in crude oil, gave back over 9%. Financials (IXM—blue line) extended its weakness, as the interest rate outlook looks to be projecting “lower-for-longer” after comments yesterday from Fed Chair Powell The S&P 500 Index (SPX—candlestick) finished the day down just under 6%. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Putting the Selloff Into Perspective

Still, it’s not unhealthy to see selloffs when the market has had this kind of run higher. Every sector benefited from the last two months of buying, which started in the Information Technology and Communication Services stocks and eventually spilled into cyclicals like Financials and Industrials. When you see this kind of all-points exuberance that’s not just focused on a few big names (like when “FAANGs” advanced and everyone else stayed in place), it’s hard to just write off the rally. 

That’s why investors should consider keeping some perspective. Yes, today represents the biggest one-day losses since March for the major indices. However, it’s not unusual to see some profit taking at times like this. People are taking profit and reassessing, so let’s take it one day at a time. From a technical standpoint, it may be positive that the SPX did just barely manage to close above the psychological 3000 level. That could be support to watch on Friday.

Obviously, losses this steep carry extra weight these days because we all remember how things fell apart back in March. It’s way too early to talk about whether that might happen again. What people should consider keeping in mind is that as bad as it feels right now to see these big numbers on the board, today is roughly a 6% drop. And tomorrow is another day. 

Stay-at-Home Can’t Save the Day, and Financials Flop

Today appears to be a “throw the baby out with the bathwater” situation with a lot of people selling first and asking questions later. Even some of the “stay-at-home” stocks like Walmart Corp. WMT and Netflix, Inc. NFLX are down. When you see this kind of pressure, it tends to be across the board.

Financials are flashing bright red today after enjoying a nice rally. We’d just finished talking about the 10-year Treasury yield doing better, and now it’s collapsing back below 0.7% after flirting with 0.9% last week. Falling yields often reflect economic uncertainty as investors flock to bonds and other areas of the market sometimes seen as “safe havens,” though no investment is truly safe. Banks can be especially vulnerable to lower yields because that often has a direct negative impact on their profit margins. 

The problem with weak Financials is that it often makes it hard for everyone else across the other sectors. While it’s true that some recent rallies have been able to advance without much  help from the banks, historically it’s a hard push. Financials have their fingerprints on every sector, and weakness in the Financial world generally can reflect weakness elsewhere, too.

If you’re a long-term investor, you might be feeling a bit nervous. That doesn’t mean you necessarily have to make any quick moves. Usually it’s not a good idea to sell stocks out of fear. Instead, maybe consider standing back and watching what happens. People who sold in late March when things were at their lows might be regretting it now, and the market tends to move in fits and starts.

As we said yesterday, however, if your stock exposure is above where you’d planned, now might be as good a time as any to think about some rebalancing. Stocks have come a long way very fast, especially on the Information Technology side. This could have some investors out over their skis a little in terms of equity exposure. 

Some talking heads on TV are saying this selloff and comeback resemble past ones, for instance, 2009. While there are some similarities, none of the past economic and market comebacks had a pandemic to deal with. In 2009, people were losing their jobs and having their homes foreclosed, which was a horrible situation. Still, restaurants and airlines could operate as normal if needed. They just had lower demand. 

Now even if demand comes back, there’s no certainty that businesses can operate at anywhere near capacity. Whatever the reason for these new cases, it might cause uncertainty and make people less likely to go out and eat at a restaurant or fly on a plane. Perception carries a lot of weight when it comes to consumer demand right now. If people don’t feel safe, that’s a big challenge. Stay tuned for tomorrow’s University of Michigan sentiment report.

Dollar Still Near Lows, But “Flight to Safety” Helps a Bit

Turning away from stocks for a moment, the historically low short-term Treasury yields caused by the Fed’s accommodative policy might be weakening the dollar a bit, as well. The greenback had been falling sharply in recent sessions and was near three-month lows going into the Fed meeting this week. This can be another form of stimulus if it raises overseas demand for U.S. goods. 

However, some economists believe the soft dollar reflects other things. The recent riots in big U.S. cities and the coming presidential election, they say, could be shaking investor faith in the world’s “reserve” currency. If that’s the case and social turmoil continues to erode the dollar, it wouldn’t necessarily be the best news from an inflation perspective over the longer run. That said, inflation seems to be the least of our problems at this juncture. Core producer prices fell 0.1% in May, the government said Thursday. 

For now, the U.S. Dollar Index ($DXY) remains near its lows, but ticked higher Thursday. Though the Fed’s dovish words yesterday pushed the greenback below 96 in early trading, the global flight to safety helped trigger a bit of a resurgence, to the mid-96 handle. For a frame of reference, $DXY traded above 100 at one point earlier this year and then spent a long time between 98–100 before the recent downward stretch. 

As the dollar scrapes against recent lows, volatility took a ride higher Thursday. The Cboe Volatility Index (VIX), which recently fell below 25, shot above 40. It’s still way down from March highs above 80, and we’ll have to watch it closely tomorrow for hints of just how nervous investors might be. If you go away now and come back tomorrow at this time knowing nothing about what the market did in between, a quick glance at crude and VIX would probably tell you a lot.

Good Trading,

@TDAJJKinahan

TD Ameritrade® commentary for educational purposes only. Member SIPC.