CWS Market Review – March 13, 2020

”The system is not really geared to what we need right now.” – Dr. Anthony Fauci

This week has been one of the most dramatic in Wall Street history. The entire world is waking up to the fact that the coronavirus is a serious public-health challenge for everyone, and that includes the world of markets.

The stock market has been getting crushed. Thursday was the fourth-worst day for the Dow in percentage terms in its 124-year history. Poetically, the Dow fell by 9.99%. The only days worse than that came in 1929 and 1987.

Twice this week, trading was halted after the S&P 500 fell 7%. Under the rules of the New York Stock Exchange, trading is halted for 15 minutes after a 7% decline. Trading is halted again after a 13% decline. If the market falls 20% in one day, then the exchange is shut down for the day. These “circuit breakers” are designed to stem a runaway market. I’m doubtful that they can be effective, but we’ll see.

The First Bear Market in Eleven Years

I’m looking over the numbers, and it’s truly been a gruesome time for the market. Over the last six sessions, the S&P 500 has fallen over 20%. On Thursday, the S&P 500 closed down more than 20% from its all-time highest close from just three weeks ago. That’s the unofficial definition of a bear market. As it turns out, Monday was the eleventh anniversary of the bull market that started in 2009. It is no more.

While it’s true that the stock market is not the economy, they are related. In the last 93 years, the Dow has had 13 bear markets. Only twice did the economy not go into a recession. This is also the fastest bear market in history. We’ve had faster 20% declines but not from the peak.

The stock market is clearly on edge. Traders weren’t reassured by President Trump’s remarks on Wednesday, nor were they comforted by the Fed’s actions on Thursday. The indexes just continued to fall. I’m afraid the Fed is pouring gasoline into a car that doesn’t have wheels.

I think it’s very likely that the U.S. economy has entered a recession. The problem is that the economic numbers we get tend to be lagging. I suspect that over the next few months, we’ll see a drop-off in production for U.S. businesses. Unfortunately, that will also lead to a rise in unemployment. I’ll be keeping a close eye on the jobless-claims reports.

Here are same stats: On Wednesday, the S&P 500 fell by 5%, making it one of the worst days for the market in history. Remarkably, it’s been the least volatile day of this week thus far. On the NYSE, there were 2,376 new lows on Thursday and just two new highs. The Volatility Index, or VIX, got up to 76 on Thursday. That’s the highest in history.

Here’s a quick quiz for you. Guess how many stocks in the S&P 500 are currently more than 10% off their 52-week high?

The answer: 502.

That’s not a misprint. Nor are my math skills failing me. There are 500 companies in the index but 505 stocks. (Side note: I did have my math corrected this week by Nassim Taleb.)

On Thursday, 338 stocks in the S&P 500 reached a new 52-week low. Not one got to a new 52-week high. In particular, energy stocks have been creamed of late. I sent you a special alert after Monday’s dramatic decline. That selloff was sparked by the price war for oil between Russia and Saudi Arabia. At one point on Monday, West Texas Crude was going for $27.34 per barrel. That’s down from $65 per barrel earlier this year.

It’s not over. In fact, I think we could see a major oil company go under. Or they might be forced into a merger. As bad as the energy stocks have performed, they’ve been a gold mine compared with the cruise industry. Those stocks have been absolutely decimated.

The impact on the bond market has been quite dramatic. At one point, the entire U.S. Treasury yield curve was under 1%. The Federal Reserve cut interest rates on Monday. On Thursday, the Fed said it would inject liquidity to prevent “unusual disruptions” in the markets.

Every day we hear something new. The World Health Organization has officially called it a pandemic. The NBA has suspended its season. Baseball probably will do the same. Broadway has shut down. Ireland canceled St. Patrick’s Day, if you can imagine that. There was even a conference on the coronavirus that was canceled due to the coronavirus. I think schools will soon close. Heck, the entire country of Norway has basically shut down. Jim Cramer said the government should suspend all taxes.

What About Our Buy List?

What about our stocks? Well, there’s been very little company-specific news for us. I’m happy to say that our Buy List has been largely outperforming the market. Of course, we don’t have any energy or cruise stocks, so that helps. Also, our stocks tend to be much higher quality. On Thursday, our Buy List beat the S&P 500 by 1.13%. That’s pretty good for a single day.

Fiserv (FISV) said this week that it will postpone its investor conference scheduled for March 25. The company said it expects to have greater synergies from its First Data acquisition.

Fiserv also stood by its previous guidance for internal revenue growth of 6% to 8% and EPS growth of 23% to 27%. CEO Jeffery Yabuki said, “We remain comfortable with our outlook for the full year based on the diversity and resilience of our business along with our current view of the market.”

The stock has outpaced the market each day this week.

Moody’s (MCO) reaffirmed its 2020 guidance range of $9.10 to $9.30, but Moody’s now expects to be toward the lower end of that range.

“We are revising Moody’s Investors Service’s full-year 2020 revenue guidance from mid-single-digit to low-single-digit percent growth reflecting ongoing uncertainty related to the coronavirus,” said Raymond McDaniel, President and Chief Executive Officer of Moody’s. “We will continue to monitor and proactively manage our response to the situation as we work to meet stakeholder expectations.”

Moody’s is down 28% over the last six sessions, but it may be due for a bounce soon.

Disney (DIS) said that Disneyland is closing down through the end of March.

Shares of Globe Life (GL) are down more than 42% over the last three weeks. That’s very surprising, since the stock is normally so quiet and well-behaved.

AFLAC (AFL) closed Thursday at $31.42 per share. That’s an extraordinary bargain. The stock now yields over 3%.

Our best-performing stock this year is Hershey (HSY) and that’s down 9.6%.

Eagle Bancorp (EGBN) is now half of its 52-week high. EGBN is down 29% over the last six trading sessions.

The selloff has largely wrecked all our Buy Below prices. I plan to gradually adjust them back to reality, but that may take some time. Have patience with our stocks. This, too, shall pass.

What to Expect from Here

The market will remain volatile. You can expect to see big swings. Bear-market rallies are common, so don’t get too happy when the market zooms on a day with little news. It may not last.

I think the Fed will soon go to negative interest rates. There’s a meeting next week, and they’ll almost certainly cut rates again.

Well-run companies tend to adapt well to a new environment. That’s what I’ll be curious to see.

Things will get better once the coronavirus starts losing. It won’t be the Fed or politics that causes the turn. The economy will be hurt as consumers start avoiding masses of people. We may have to spend a few weeks riding out the storm. From what I understand, the people of South Korea have already showed signs of beating the virus. I hope we’ll do the same!

That’s all for now. Next week will be another hectic week for stocks. The Federal Reserve meets on Tuesday and Wednesday. The Fed will also update its economic projects for the next few years. I think Fed members will be much more cautious with their estimates. On Tuesday, we’ll get the retail sales report for February. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on March 13th, 2020 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.