Key Points

  • As if the past two weeks weren’t enough, the market is “limit down” pre-open today.
  • The economic implications of COVID-19, and now the crash in oil prices, are significant enough to make a recession likely.
  • Stocks and bond yields have reconnected – both sending a dire message to monetary and fiscal authorities.

In the easiest of times (are they ever, really?) it’s futile to make predictions about the market with any semblance of accuracy. Clearly, these are not the easiest of times; so the futility is magnified. Even with non-stop coverage of COVID-19; with every question answered, there’s another question to ask. The human toll is immeasurable; but at this stage, so are the economic and market tolls. Ideally, we do look back and say some of the hysteria was overdone; but being prepared (and disciplined when it comes to investing) is unlikely to make things worse.

As most know, there is some reason for hope given the flattening out of the number of confirmed COVID-19 cases in Mainland China. There is also a still-sharp trajectory for the number of recoveries. The problem is that cases outside Mainland China have only recently begun to accelerate—with expectations of significant jumps to come in the United States once testing can be done more widely. In the meantime, markets are at the mercy of virus news—good and bad.

Yellow Line Needs to Stabilize

Source: Charles Schwab, Johns Hopkins’ Center for Systems Science and Engineering, as of 3/8/2020.

Manic week

To say today’s market open is treacherous would be an understatement. As I was putting this report to bed, S&P 500 futures were “limit down” (when trading curbs are triggered), meaning a drop at the open of at least 5%. Contributing to today’s renewed plunge is the 30% crash in oil prices courtesy of the disintegration of the OPEC+ alliance triggering an all-out price war between Russia and Saudi Arabia.

From a recent high of nearly $63 last April, WTI crude futures fell below $30 intraday this morning. This is likely to put increasing pressure on the credit markets given that energy companies are the largest issuers of junk bonds. In addition, more than 11% of the investment grade corporate bond market sits within the energy sector, with many companies rated BBB—the lowest rung. Increasing cash flow pressures are likely to result in downgrades, which would further weigh on junk debt.

Last week’s S&P 500 market action was a manic set-up to what we are seeing today:

  • Monday +4.6%
  • Tuesday -2.8%
  • Wednesday +4.2%
  • Thursday -3.4%
  • Friday -1.7% (thanks to a +2.4% rally in the final hour of trading)

That of course followed a week with five straight declines—two of which were more than -3% and one which was nearly -4.5%. According to Bespoke Investment Group (BIG) we have only seen daily action like this over a two week span a few other times since the S&P 500’s inception in 1928. Aside from the multiple occurrences during the Great Depression era and a brief period around the Crash of ’87; it’s since only happened in late-2008 during the depths of the Global Financial Crisis (GFC) and again in August 2011 when U.S. debt was downgraded.