As Investors Continue In Risk-Off Mode, Eyes Turn to Bonds, Gold, Defensive Stocks

Despite a better-than-expected jobs report, it still doesn’t seem like investors want to carry as much risk into the weekend.

The government’s February nonfarm payrolls report came in well ahead of expectations with a print of 273,000 when only 170,000 had been expected in a Briefing.com consensus. Although worries about the coronavirus were ratcheting up during February it seems like businesses took that in stride, at least in terms of hiring. However, it remains to be seen whether that trend will hold up in the March report.

A strong jobs market has been a key underpinning to domestic consumers’ willingness to go out and spend money. The continuation of that would be key to helping the U.S. economy weather the widening coronavirus outbreak. But if the outbreak gets worse here in the United States, that trend could start to falter.

That’s one of the things investors seem particularly worried about amid the fallout from the coronavirus, and this morning, as they continued to shun equities even after the jobs report, investors kept on buying up U.S. government debt. Before the jobs report came out, the yield on the 10-year Treasury had sunk to a new all-time low below 0.7%.

If the Dow Jones Industrial Average ($DJI) ends up finishing today lower, it will be its seventh Friday in a row of down closes. But something to consider watching for during the day is whether the S&P 500 Index (SPX) is able to push back above the 2940 level.

Market Roundup (Or Should We Say Round Down?)

Yesterday was another ugly day on Wall Street as it looked like market participants were staying  away from risk as much as possible.

Stocks fell dramatically at times Thursday but major indices ended a bit off their lows and the SPX closed above the psychological 3000 level. That’s a small victory but doesn’t seem like much to celebrate when you consider the close was more than 3.3% below Wednesday’s. Major indices have finished up or down 3% or more in six of the last 10 sessions. 

Risk-off sentiment bled into oil, which declined despite the possibility of OPEC cutting production if Russia agrees. The risk-off mood apparently prompted safe-haven buying in gold and U.S. government debt, with the yield on the 10-year Treasury staying under 1% and even hitting an all-time low south of 0.9%. The bond market seems overbought, but its extreme moves also could be an indication that we might have more pain to slog through before things improve.

In addition to news of California declaring a coronavirus-related state of emergency, market participants seemed to focus on the International Monetary Fund’s (IMF) announcement that global growth this year will be below last year’s 2.9% and the International Air Transport Association’s prediction that global airlines could lose $113 billion if the outbreak continues to spread.

Meanwhile, Apple Inc AAPL joined other high-profile companies in canceling its plans to attend the South by Southwest music and tech festival. Southwest Airlines LUV said it expects a Q1 revenue hit from the virus. Hotel and airline stocks continued getting hit. All this is leading to a snowball effect amid worries that the U.S. consumer—who was a key player in keeping the rally going much of last year through the long trade war—might pull back.

Some Rays Of Light, But We’re Still In The Woods

While investors and traders seem to have generally been focusing on the negative, there have been some bright spots to consider this week. These include the Fed’s surprise rate cut, an IMF announcement of a $50 billion aid package, and news that Congress passed an $8.3 billion emergency spending package to combat the spread of the virus.

Another positive sign: despite the pain of this current leg down, it’s been a somewhat orderly selloff. 

Still, the VIX shot up to 48 on Friday morning. And don’t be surprised if VIX stays above 30 for a while to come. It might take a month or two to get things back to a more normal kind of market, if patterns from history hold.

Despite the brighter spots, it doesn’t seem like a good sign that “defensive” sectors like Utilities and Real Estate have been leading rallies while cyclicals, especially Financials, lead things lower on days like today. It’s going to be very hard to have a sustained rally if Financials—the second largest SPX sector—keeps getting pounded.

Financials are probably going to stay under pressure as long as the yield picture doesn’t start to improve. Right now, there’s a lot of red in yields as investors continue piling into the bond market. However, we are seeing signs of improvement at the epicenter of the virus—China— where people are starting to get back to work and mainland equities have been on the rebound. Despite a moderate Friday selloff, China’s market turned in a solid week to near all-time highs. It might help to think of China as being three weeks ahead of the rest of the world in terms of the virus’ spread. 

CHART OF THE DAY: ECONOMIC LIFEBLOOD: Concerns about consumer and business demand have shown up in theDow Jones Transportation Average ($DJT–candlestick), which skidded more than 5% Thursday and was down around 20% since its January high. That’s a much greater decline than we’ve seen in the S&P 500 Index (SPX–purple line). Most of the decline in $DJT had to do with the Airlines sector which got hit especially hard by coronavirus fears.  Seasoned traders often look at the $DJT as a barometer of the broader economy. 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.  

Would the Selling Have Happened Anyway?In an alternate reality where COVID-19 didn’t happen, we might have seen a correction anyway. The market had gotten extremely overbought and overvalued by mid-February, according to investment research firm CFRA. “Correction was in search of a catalyst,” CFRA said. “Coronavirus answered the call.” But CFRA doesn’t see the correction turning into a bear market. “We continue to see an economic slowdown rather than recession, which would limit the carnage to a correction rather than a new bear market,” CFRA said.

 Coronavirus Not a Catch-All:  It’s tempting to look at any disappointing data now and blame it on the virus, but it’s not necessarily that cut-and-dried. For instance, factory orders fell 0.5% in January, worse than the 0.1% drop that analysts had expected according to Briefing.com. It doesn’t seem like the coronavirus would have had much impact on the January numbers because China didn’t really start clamping down on travel until late January, which was already expected to be a slow time because of the Chinese Lunar New Year break.

The U.S. wasn’t in crisis mode in January, and domestic economic data back then seemed pretty solid. Plus, the stock market didn’t really start reacting to the virus threat until last month. So it seems like we’ll have to wait until next month to see whether, or how much, the epidemic might be affecting factory orders in the United States. 

Services Sector Sailing Smoothly: Factory orders track manufacturing, which accounts for just 11% of the economy and isn’t necessarily representative of what the other 89% is doing. Despite encroaching worries about the coronavirus, a recent look at the non-manufacturing section of the economy was largely positive. The Institute for Supply Management’s February non-manufacturing index rose 1.8 percentage points to 57.3%, a stronger showing than the 54.8% expected in a Briefing.com consensus.

Although most respondents are concerned about the coronavirus and its supply chain impact, they remain positive about business conditions and the overall economy, the ISM said. “The key takeaway from the report is that the February number is encouraging in its own right, but with the coronavirus caseload rising in the U.S. and the public’s attention to containing it increasing, doubts are festering that the strength can be sustained,” Briefing.com said.

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.

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