The Prize No One Wanted: Dow On Pace For Steepest Q1 Loss Ever As Quarter Finally Ends

This stomach-churning, turbulent, maddening, unprecedented quarter finally stumbles to the finish line today, and it will feel good to have it in the rear-view mirror. The Dow Jones Industrial Average ($DJI) is on pace for the worst Q1 in its long history, down 21% going into the final day.

Unfortunately, there may be a lot more misery ahead in Q2 as the U.S. continues to grapple with the virus. Economists forecast millions of job losses and a shrinking economy. Even worse, many people around the world are struggling with illness. Until the caseload starts to fall, it’s hard to get too bullish about the markets. 

We’re on a nice run the last week or so, and stocks do seem to be finding some footing even as the S&P 500 Index (SPX) remains down 19% year-to-date. The SPX is up 17% from last Monday’s lows and the $DJI is up 20%. Major indices rose four of the last five days. Still, lots of dismal data stares investors in the face as the end of the quarter looms, and how the market reacts might tell us a lot.

Last Thursday, stocks bounced despite absolutely horrendous initial unemployment claims. Today, there’s consumer confidence, followed by a slew of fresh numbers tomorrow and monthly payrolls on Friday. Some analysts say if the market can continue shrugging off what’s expected to be historically bad statistics, it could be a sign that maybe it’s starting to turn the corner. 

Speaking of data, China reported some decent manufacturing sector results last night. The official Purchasing Managers’ Index (PMI) for March was 52.0, when analysts polled by Reuters had expected 45. That—along with a nice boost for crude oil amid word of U.S.-Russia talks— might have given U.S. futures an initial overnight lift.

Still, action was choppy in the overnight session and major U.S. indices approached the opening bell on a negative note. There didn’t seem to be any major news impetus for the weakness.

Footing Feels More Solid—For Now

Coordinated government action might be providing investors more optimism. Last week’s stimulus could help, though it’s going to be interesting to see how it plays out across various sectors. There are likely to be winners and losers, with some analysts pointing to Energy as a sector on the wrong side of the list.

The powerful rally on Monday came as volatility took a step back and the 10-year Treasury yield finished lower but up from its weakest levels of the day. Bonds sold off a little early Tuesday, so it will be interesting to see if we get a little bit of a shot in the arm for Financials from that as the 10-year yield nears 0.7%.

At the same time, those recent stock market and Treasury yield lows aren’t too far behind. We’re not out of the woods yet by any stretch of the imagination and caution seems to be the note of the day. The Cboe Volatility Index (VIX) is edging its way back toward 60. That’s down from historic highs above 80 not long ago, but still at levels indicating possible sharp moves ahead.

We’ve talked about the importance of not having huge swings. Yesterday was a big move higher, but ranges appear to be narrowing and that’s what many investors probably want to see. Trading this market still comes back down to the basics of investing: Knowing your time frame and what kind of investor you are. There are still plenty of stocks with attractive prices out there. Are you trying to pick a bottom, or are you looking for a range you’re comfortable with? Those are some of the questions to consider asking yourself. 

Health Care and Biotech Emerge from Pack

There’s an obvious path out of this devastating hit to the markets if health care companies together with the government can find a way to slow the virus' spread and discover a treatment. It’s amazing to see the efforts underway on that front, and they’re starting to get rewarded in the Health Care sector. 

With so many people focused on possible treatments and vaccines, it’s not too surprising that Health Care is the third-leading sector year-to-date behind only Utilities and Information Technology. A nearly 5% rally in Health Care led the way yesterday.

The biotech sub-sector of health is doing even better from a stock market standpoint, down just 9% year-to-date (see chart below). News that Johnson & Johnson JNJ plans to start a vaccine trial helped get the week off to a roaring start. Novavax, Inc. NVAX, a vaccine company, rose more than 9% Monday. Abbott Labs ABT also made a big upward move after announcing a point-of-care test to detect COVID-19 in as little as five minutes.

Sector Rotation Improves Vibe

Another potentially good sign is that cyclical sectors like Communication Services and Information Technology are starting to get some traction. Utilities, which blew away many other sectors last week as investors hunted for dividends in this time of low Treasury yields, took a back seat to tech on the leaderboard Monday.

There’s a lot of solace in tech leading the way. It’s nice to see some sector rotation coming along after weeks when defensive plays like Utilities and Staples dominated, or when people were buying up shares of beaten down cruise ship and airline companies despite the soft fundamentals.

The tech strength is reaching across most areas of the sector, from chips to software to cloud services. Video gaming is another hot spot right now. Think about the things people turn to when they’re stuck at home, like video games and web conferencing. Activision Blizzard, Inc. ATVI rose more than 2% Monday, and Take-Two Interactive Software, Inc. TTWO went up 6% as investors flocked to the gaming aisle. Zoom Video Communications, Inc. ZM had an off-day from a market perspective Monday, but it’s been rolling along pretty well lately.

Then look at Microsoft Corporation MSFT, which says its cloud services demand is up nearly 800% as people come together through the cloud. That’s an amazing statistic. There’s no word yet on how the crisis is affecting Amazon Web Services, the cloud system of, Inc. AMZN, but this situation is probably helping them and other cloud competitors like Alphabet Inc. GOOGL GOOG as well. They might have big numbers too. Cloud data is powering the surge in things like interactive conferencing, and it’s all blending into the data providers.

When there’s a crisis, it sometimes causes a shift in how people behave afterward. People might stop traveling on airlines so much for business, and ZM and MSFT could be the beneficiaries. We could be in this situation another month, according to the federal government, and these companies can get real momentum and possibly maintain momentum when the crisis is over.

Chip stocks like Intel Corporation INTC and Advanced Micro Devices, Inc. AMD also got boosts Monday. INTC said it’s launching new chips in April, which was a pleasant surprise that the market seemed to like.

What’s not so comfortable to watch is how airline and cruise stocks keep getting pounded. Monday was another rough day on the seas and in the air. Congress is directing a lot of money toward the airlines, but that didn’t seem to help too much on Monday, anyway.

These stocks might have been hurt by the government announcing the shelter in place situation would last until the end of April. There’d been some hope before that of restrictions getting loosened sooner, but predictions of possible high death tolls seem to be making the country more cautious, as a whole. 

While the news was hard for airlines and cruise investors to hear, hopes that this cautious attitude could do more to contain the virus might have been another factor behind Monday’s rally. The question is whether it’s a one-day story or has legs. We’ll soon learn.

CHART OF THE DAY: HEALTHY CHECK-UP: The Health Care Sector (IXV—candlestick) is outpacing the S&P 500 Index (SPX—blue line) pretty handily since the start of the year, this chart demonstrates. Outpacing them both is the Nasdaq Biotech Index (NBI—purple line), which got another lift Monday amid hopes for progress on treating and preventing the virus. Data Sources: S&P Dow Jones Indices, Nasdaq.  Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

1986 Revisited? Crude stayed in the doghouse to start the week, and analysts now say many of the oil exploration companies could go bankrupt if these 18-year low prices continue much longer. Some say it might get worse before it gets better, forecasting crude to drop below $10 a barrel at some point after it fell below $20 on Monday to its lowest close in more than 18 years.  It hasn’t been below $10 in almost 35 years, going back to Saudi Arabia’s flooding of the market in early 1986. One hope is that the U.S. can get Saudi Arabia and Russia back to the negotiating table to at least agree not to flood the market with crude just when few people need it. News of planned negotiations between the U.S. and Russia to stabilize oil prices might be helping crude step back above the $21 a barrel line early Tuesday. 

Old “Friend” Returns: After hogging headlines most of last year, tariffs on China faded to the back of the room the last few weeks as everyone grappled with the virus. Then The Wall Street Journal reported late last week that the White House was set to suspend the tariffs to help U.S. importers, which would have possibly provided Industrial and Material stocks a little support. If you saw the headline but not the follow-up, it looks like no dice, after all. President Trump said the report was inaccurate. 

One thing to remember is that some analysts think the U.S. manufacturing sector started suffering long before the virus, due partly to the trade war. The “Phase One” deal signed in January kept most of the tariffs in place, and last month The WSJ reported that the U.S. Trade Representative was granting fewer tariff waivers to American firms. So the story continues, though it’s definitely in the background now. The March ISM manufacturing index due tomorrow morning is expected to drop to 43.3, from 50.1 in February, said. That would be the worst showing since the Great Recession of 2008–2009.

Silver Lining with a Twist: The economy was relatively healthy going into this crisis, unlike, say, in 2001 when the Sept. 11 attacks hit an economy that was already slowing. Because things were in decent shape going in this time, some economists believe the economy could potentially recover more quickly than in the weeks and months following the terror strike. The stock market didn’t bottom after that for 13 months, until October 2002. Also, the stock market didn’t bottom in the 2008–2009 bear market until March 2009, about six months after first getting rocked. The economy had been on thin ice already even before the full extent of the crisis emerged in September 2008

On the other hand, it’s important to have some perspective. When the virus hit, the SPX was at all-time highs and near an all-time high valuation. At some point, it was probably due for a decent pullback of maybe 5% to 10%, just to flatten out some of the froth. We got that and a lot more due to the virus, but because things were so stretched then, it could mean the market won’t necessarily go right back to where it was once this ends. Also, even at current levels, the SPX trades at a pretty high multiple, historically, to some of the lower analyst estimates on forward earnings.

Posted In: TD AmeritradeEarningsNewsCommoditiesMarkets

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