New Surge In Coronavirus Cases Raises Investor Concern About Economy Reopening
News that Apple AAPL (AAPL) is re-closing some stores in the Houston area and Disney DIS (DIS) is postponing the reopening of theme parks in California are examples of what the market seems to be afraid of right now.
Investors and traders are worried that spikes in coronavirus cases in those states, and others, will delay the re-opening of businesses and stunt the economic recovery that corporate America is hoping for.
In economic news, weekly jobless claims came in higher than expected but continued to show a declining trend. Initial unemployment claims hit 1.48 million, ahead of a Briefing.com consensus of 1.25 million. That’s down from the prior week’s upwardly revised 1.54 million print, but both of those figures are below the 1.566 million figure from the week ended June 6. Also of note, continuing claims slipped below 20 million.
Meanwhile, May durable goods orders came in higher than expected, rising 15.8% month over month when an 11.6% gain had been expected in a Briefing.com consensus. That appears to be a green shoot for the economic recovery, but we’ll have to see if it lasts.
Investors are also monitoring developments on the trade front amid news that the Trump administration is thinking about new tariffs on goods from certain European countries.
After the close today, the Federal Reserve is scheduled to discuss the health of the banking sector in a report that could be closely watched in light of worries about credit losses because of the pandemic. It may be worth watching Financials sector stocks ahead of the stress test report.
A Balancing Act
For a while now, it seems like the market has been straddling a line that’s kind of hard to define. One foot seems to be on the side of optimism about an economic recovery while the other foot seems to be on the side of uncertainty given that the pandemic isn’t over.
A slightly different analogy might liken the market to someone playing hopscotch. Some days it seems like one foot is solidly in an upbeat square while other days it seems like the whole market has jumped and shifted its weight to a square where pessimism reigns.
On Wednesday, the market jumped to the latter, fretting about rising coronavirus cases in several states and news that some northeastern states are ordering travelers from hotspot jurisdictions to self-quarantine.
All that stoked worries about the pace of the domestic economic recovery, helping send the Cboe Volatility Index (VIX) nearly 8% higher and boosting demand for U.S. government debt, pressuring yields.
Oil prices also felt some pressure yesterday that is continuing this morning. After crossing above $40 per barrel earlier this week, oil is now trading below $38 after government data showed that domestic crude inventories continued to rise and amid worries about demand if the economic reopening falters.
As might be expected in such an environment, shares of companies that would benefit from a broad reopening got hit. Cruise line companies made up the biggest three losers in the S&P 500 Index (SPX), casino stocks got hammered, and airlines also took it on the chin.
On the flip side, Kroger KR (KR) was the biggest winner in the index, perhaps as investors think people will continue shying away from restaurants and buying more food—not to mention other staples like toilet paper and hand sanitizer—at grocery stores so they can eat at home.
Heading Toward A Tipping Point?
Basically, investors want the economy to reopen and remain open and to see infection counts decline. And to a large extent, that’s what market participants have been pricing into the market in the recent market runup.
But the resurgence in coronavirus cases seems to be throwing a wrench into the works. At this point, it’s too early to say whether Wednesday’s sharp selloff is part of a bigger downturn, but it might give investors some pause, especially in light of the big selloff we saw on June 11 and the SPX’s inability to rise back to the highs from just before that.
It appears that the market may have entered into a new stage of needing direction. It doesn’t seem that the worries over a virus resurgence are enough to truly start forming a down leg of a W-shaped recovery. But without some new catalyst to give market participants some optimism, stocks might not be able to move much higher either.
If you’re looking for any kind of positive takeaway from Wednesday’s selloff, maybe it’s on the technical side. The SPX managed to finish above what could be a key support level at around 3020, which marks the 200-day moving average. That could be an area to watch today if there’s any more weakness.
If the 200-day holds, some investors might see it as a bullish development. On the other hand, if the SPX falls under that level, and especially if it closes below 3000, it could conceivably bring more selling. Secondary support could possibly be around 2980.
The SPX fell below the 200-day for a few days in mid-June, but other than that, it generally has traded above it since the end of May. The way it clawed back from its test of the 200-day earlier this month might have helped propel things higher in the following weeks. Maybe today’s trading could provide some insight into whether we’re in for a repeat of that or if there’s more downside to come.
A potential catalyst to the upside could be some sort of coordinated federal guidelines on face coverings, while more dire numbers about a resurgence could keep the market on the backfoot.
Cash On Hand: Some professional money managers say there’s still plenty of cash on the sidelines, potentially meaning less chance of another meltdown like a few months ago (though nothing is certain). At that point, fear of the unknown—the pandemic—drove most of the selling and pushed major indices well below support levels as many investors sought “safety” in cash and bonds. Today, while there’s still no virus cure or vaccine, COVID-19 is more of a known quantity. That doesn’t mean anyone can get sanguine about a pandemic that has killed so many, or go “all in” on stocks at this point.
There’s just a growing sense that the pandemic’s biggest impact on the economy may be behind us, though suffering continues across much of the country. Another thing fueling those thoughts is that every recent market hiccup, including the one earlier this month that saw the SPX fall nearly 6% in one day, has met “buy the dip” sentiment. While the past isn’t necessarily predictive, having all the money built up on the sidelines—along with the so-called “Fed put” in which the Fed has made clear it’s using all its tools to support the economy—could mean the market is fundamentally a little healthier now than when the crisis first hit. Also, the Fed’s constant chipping away at rates has left yields historically low across many investable assets, so comparatively strong stock market yields might entice some investors.
Mind the Gap: Currently, there is a pretty wide gap between the best and worst performing sectors of the SPX. In the year through Tuesday’s close, Information Technology was up 33.88% while Energy was down 36.57%. Normally, the difference averages just 42 percentage points in any given rolling 12-month period, according to CFRA. We’re above 70, as of Tuesday’s close, which according to CFRA is around two standard deviations above the mean. Historically, differentials above one standard deviation have preceded 12-month forward SPX average price drops of 2.4% instead of a typical price rise of 8.9% during all periods. Also, the forward 12-month SPX return was positive a little less than half of the time during periods of wide differentials versus 79% for all periods. “Should history repeat, and there’s no guarantee it will, today’s extreme popularity of technology over energy may signal subdued forward returns for the market should tech’s favored status fade,” CFRA said.
IMF Expects Bigger Contraction: A gloomier outlook wasn’t confined to the United States yesterday. The International Monetary Fund’s latest economic outlook for the global economy was also on the dour side. In an update on Wednesday, the body said global growth is expected to decline by 4.9 percent in 2020. That’s 1.9 percentage points below its previous forecast of a 3% contraction. “The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” the IMF said. Of course, with the coronavirus, it can be pretty hard to hit the bullseye when it comes to forecasts. Let’s hope that a resurgence in cases doesn’t end up making another downward revision necessary.