Bears On The Prowl: $DJI Now Down 20% From Recent Highs As Virus Impact Contemplated

For the first time in more than a decade, a bear prowls on Wall Street. The Dow Jones Industrial Average ($DJI) closed down 4.5% Wednesday, off more than 20% from its recent all-time high. A 20% decline from highs is the definition of a bear market. 

The S&P 500 Index (SPX) isn’t quite in bear territory yet, down 19% from its high and 4.9% on the day. This won’t necessarily make anyone feel better about their portfolios, of course.

Worst-hit sectors so far include Energy (now down 41% year-to-date and in a bear market for a while now), and transports, which are down 28% from recent highs. Small-cap stocks have been getting beat up, as well. Some of the stocks taking a dive Wednesday included Boeing Co BA, which fell double-digits, and the cruise ship companies. 

It was a crazy day in every sense, but not the kind of crazy investors want to see. It started with the Bank of England lowering rates and the market selling off. Then stocks seemed to find some support. However, when the World Health Organization (WHO) declared the coronavirus a pandemic, that led to a bigger sell-off. 

In fact, the selling that followed the WHO declaration looked like the first hint of “panic selling” since all this began, but cooler heads ended up prevailing. Still, we ended the day in a bear market for the first time since the 2008–2009 era.

As we’ve discussed, volatility is likely to stay elevated. The Cboe Volatility Index (VIX) finished the day just shy of 54, which is down from Monday’s highs but still near 11-year peaks.

If you’re looking for something positive, it was good to see the SPX stay above 2740 at the close. This has been a big pivot point for chart-watchers. To be fair, though, “technical support” hasn’t been too supportive lately. The market keeps blowing through support levels, maybe a sign that investors are repricing based on the fundamentals.

This is hard to watch, no doubt. If you’re a long-term investor, you might want to keep thinking long-term and not focus too much on the daily ups and downs. If you have years of investing ahead, this could someday look like a blip. That’s how it’s been with corrections, historically. Sometimes it can take a longer time to come back than others, of course.

It’s harder if you’re close to retirement or already in retirement. While no one says things can’t get worse, the thing to keep in mind is that most economists don’t seem to be expecting too much long-term damage to the economy. Even if we see a recession—and that’s not a sure thing—remember that recessions are a natural part of the economic cycle, and the economy (and the market) always has come back even from the worst ones. Many economists are now saying if a recession happens, it might be mild.

People need to take a deep breath and expect craziness to continue for the next few weeks as events and meetings continue to get canceled and companies continue making contingency plans.

Virus Impact Considered

By now, it isn’t even the virus itself that’s necessarily hurting the market. It’s the ancillary reaction to the virus and the downhill impact of that.

It’s starting to look like this will have a huge impact on businesses and cities. When you hear about the possibility of the NCAA tournament being played in empty stadiums, for instance, or some of the steps Major League Baseball is taking, you realize the financial impact this can have. People worry about consumer spending, but when you cancel so many events, people just can’t spend. Think about all the T-shirts and caps people buy at sporting events, for example.

Also, the crude market being down more than 30% from last month, with U.S. futures finishing below $33 a barrel today, could have major implications for the economy. Remember, the U.S. is an oil exporter. This isn’t the 1990s any longer, when cheap oil could help fuel economic growth. There’s some of that, but it could be outweighed by the negative impact on the energy industry. Don’t just think of the shale drillers and exporters, but beyond that. Companies that make piping, railroad, trucking and shipping companies, and all the businesses in places like Texas that depend on revenue from the oil industry, could be at risk.

Investors are monitoring the impact of all this and re-evaluating what stocks are worth. 

Signs Of Bond Market Exhaustion

Bonds, meanwhile, showed signs of rally exhaustion. The 10-year yield recently stood at 0.86%, which is up more than 50 basis points from the week’s lows. The gold market also saw losses today. It’s interesting to see so-called “safe haven” assets retreat a time like this, but it could reflect hopes for fiscal stimulus.

If fiscal stimulus is on the way, it seems to be taking longer to show up than some investors had hoped. There’s nothing new in the headlines today, though earlier some articles suggested the Trump administration might cut the payroll tax to zero or extend sick leave to all employees 

It’s also possible—maybe even likely—that Congress and the president could ultimately choose specific industries like airlines, cruise lines, and hospitality and try to help them through this crisis. This could mean some sort of bailouts. Investors are awaiting news. If no action comes soon, or if Congress and the White House can’t agree what to do and start squabbling, it could mean more pain for the transports and other sectors. 

Markets have already baked in more Fed action. Futures put 100% odds on another rate cut next week, and the only question is how much. The end-of-the-day tally Wednesday had chances of a 50-basis point cut at just below 50% and odds of a 75-basis point cut at a little above 50%.

CHART OF THE DAY: DOW IN BEAR MARKET TERRITORY: The Dow Jones Industrial Average ($DJI-candlestick) fell below its 23.6% retracement level from the 2018 low to the 2020 high. The index is now more than 20% below its February highs, putting it in bear market territory. 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.

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.