S&P 500 2711 -8.8% for the week 10-year Treasury yield 0.95%
Global equity markets experienced a dramatic selloff in the week ending Friday, March 13th, as the S&P 500 was down -8.8% for the week. Market indices plunged by roughly 10% in one day on March 12th, when the Dow Jones Industrials fell by more than 2300 points, but the Dow rebounded by almost 2000 points the next day. Amid these record-setting swings, the volatility index, or VIX, rose to an extremely high level of 75.
In the meantime, bond prices turned down from their extremely overbought level, with the yield on 10-year Treasury bonds closing the week at 0.95%.
Significant developments included historic cancellations of major events, the World Health Organization declaring the coronavirus to be a global pandemic, President Trump declaring a national emergency, Congress devising a major fiscal stimulus plan, and a sharp drop in oil prices.
The price of oil plunged to roughly $32 a barrel, as Saudi Arabia and Russia entered a price war. As mentioned last week, Saudi Arabia is planning to increase oil production, and Russia said it would not agree to any production cuts. Each country would like to hurt the other by forcing oil prices down, and both would like to hurt the U.S. shale oil producers, who need an oil price of roughly $40 a barrel to break even. The drop in oil prices to the $32 range could lead to debt defaults or bankruptcy among U.S. shale producers. This was reflected in a sharp drop in the high yield bond market last week.
As has been widely reported, numerous major events have been cancelled and schools closed around the world, as people have been told to stay home and avoid large gatherings. St. Patrick’s Day parades were cancelled, Disneyland was closed, and major league sports leagues have suspended their seasons. The resulting slowdown in consumer spending is leading to forecasts of recession in the U.S. and abroad.
Amid these chaotic developments, China tried to show that things are getting back to normal, as the majority of factories in China were getting back to work, and the number of new coronavirus cases appeared to be decreasing.
Government Policy Response
Vice President Pence’s coronavirus task force took a number of steps to address the crisis, such as removing regulatory barriers to the development of vaccines, waiving insurance copays for testing, and covering the medical expenses of uninsured patients.
President Trump met with top banking executives at the White House, and they made assurances that the financial system is healthy and that banks are well-capitalized and have plenty of liquidity, a situation very different from the financial crisis of 2008. The bankers stated that they will continue lending to small businesses and make plenty of credit available.
On Wednesday March 11th President Trump addressed the nation, announcing a travel ban from Europe, but markets plunged the next day as investors wanted to see more progress on a major economic stimulus plan. Then on Friday March 13th the President declared a national emergency and held a major press conference at the White House, announcing numerous steps including the government working in partnership with the private sector in a variety of ways, such as providing virus testing at major retailers such as WalMart (WMT). Economic advisor Larry Kudlow stated that the fiscal stimulus plans involve at least $400 billion, and possibly a lot more if a payroll tax holiday is included. These steps led to a market rally, as they provided investors with increased confidence that the virus and its impact are being addressed with all available policy tools.
Conclusion
In general, this is not the time to sell stocks. Amid the current volatility It is important to maintain a long-term perspective. There is a very good chance that the current selloff will turn out to be a good buying opportunity. A year from now the virus will probably have disappeared, the economy will have recovered, and the market will be higher than it is today.
However, in the near term the market is likely to remain highly volatile and unpredictable on a day-to-day basis. Many indicators show that stocks have become extremely oversold, but more downside is still possible in the days and weeks ahead, depending on the news about the virus and its effect on the economy.
But as mentioned a week ago, a good tactic in these situations is to place buy limit orders at prices that seem too low, in order to get into selected stocks if they reach extremely oversold levels. As an example, we suggested placing a buy limit order on Microsoft (MSFT) at a price of $140. The stock dipped down to $139 on March 12th, so this limit order would be executed. The next day the stock shot up to $159.
We would continue to use this strategy, because large percentage gains can be made by buying at very oversold levels, especially using double or triple leveraged ETFs. For example TQQQ, the triple long QQQ ETF, fell to roughly $45 on March 12th before rebounding to almost $57 the next day, a gain of 27%. This is not just for short-term trading purposes. We may want to hold these stocks or ETFs for years, and buying them at very oversold levels can make a major contribution to performance. Thus it would make sense to place more buy limit orders on a variety of stocks and ETFs, such as TQQQ in the $35 – $45 range, in case more downside occurs and the market becomes even more oversold that it has been.