On December 11th of 2018, I wrote the following in Kenny’s Commentary:
“Knightian uncertainty [which is the ‘lack of any quantifiable knowledge about some possible occurrence’] may pull markets lower yet – effectively triggering a meaningful and sustained economic slowdown and equity market bear sooner rather than later. My sense, as I have outlined in previous notes, is that we do tip into a mild recession in the first half of 2020, but that doesn’t mean there aren’t opportunities for a slowdown sooner… This week will be a significant test for equity markets. Given last week’s drubbing and revisit to recent lows, the momentum is lower. A meaningful break lower by US equities, given the technical weakness with which we closed out last week, could well deliver a negative performance on the year.”
Last week’s price action, across all asset classes and debt markets, was historic on a multitude of levels. Equity markets took investors for a ride–the likes of which (on a point basis) has never materialized. The violent swings in prices that rattled US equity markets left investors utterly bewildered, unnerved and exhausted by end of week. Over the week, the Dow Industrials gained and lost nearly 4,500 points on an close-to-close basis. The unprecedented price gyrations fueled a very significant escalation in the “risk-off” trade across the board.
Perversely, the major equity markets indices ultimately registered a largely unchanged to positive week from a pricing stand point, despite all of the intraweek dramatics. The Nasdaq Composite actually gained 8.25 points, or 0.10%, on the week. Additionally and technically significant, the Nasdaq Composite held its ground at the 200 DMA on Friday as a result of a meaningful intraday reversal. The S&P 500 added 18.15 points, or 0.61%, on the week, and the Dow Industrials outperformed to the upside for the week with a gain of 455.42 points, or 1.79%. As evidenced below, last week’s price action left the majors between 12% and 13% below their respective 52-week highs.
The note I sent you a week ago highlighting the significance of the reversal that materialized on Friday, February, 28 remains topical for several reasons. Firstly, the volume metrics of that day (2/28) clearly reflect what I would refer to as a near term capitulation sell-off. Volume was 125% above its trailing average for example, and despite all of the volatility we saw materialize last week, the majors did not close below the previous week’s closing lows. Additionally, there was no trading session last week in which trading volume eclipsed what materialized on Friday, February 28.
Does that mean that our equity market sell-off has come to a neat and tidy conclusion? Unfortunately, no–though we may continue to see some institutional buyers lured into the market, as we saw last week on several occasions. Equities don’t trade in a vacuum, and even if they did, the bond market is telling us a different story–and not just the bond market domestically. We are witnessing a global meltdown in rates that has never been brought to bear in recent history.
The Federal Reserve cut interest rates by 50 bps last week in an unscheduled meeting on Tuesday in an effort to head off the emerging economic threats that are a result of the coronavirus. The vote by the FOMC was unanimous and drops the current target range to 1% – 1.25%. Fed Chair Powell did underscore the strength of the U.S. economy and indicated that the heavy lifting that would be needed in coming months to head off the pandemic would not be Fed-centric. The Fed was simply attempting to support the economy in the face of indications that challenges are emerging. Seconds after the Fed move on rates, I received a call from Reuters News asking me for my thoughts on the Fed rate cut:
“The rate cut underscores the magnitude of the problem that the global economy is facing… Normally, markets would welcome a rate cut, and they were hoping for it. Now that we’ve got it, the question is, what’s next?” (click for more on) Seeking Alpha
The significance of this unscheduled 50 bps reduction in rates can be summed up by the fact that the last time the Fed moved on rates outside of their scheduled policy setting meetings was in 2008 – during the height of financial crisis. That point was not lost on markets. Promptly after the Fed cut on Tuesday morning, US equity markets gave up any attempt at a follow-through rally from Monday’s 1,300+ point gain, which was ultimately set in motion by the previous Friday’s reversal.
The ensuing compression in yields of US treasuries across the yield curve was immediate and brutally efficient. Jeffrey Gundlach on Friday went so far as to say that he thinks it is smarter to remain in cash than be in 10-year treasuries given all the uncertainty in the market. The question now is whether the Fed will cut again at their upcoming meeting on March 18. According to Bloomberg Business, the 10-year closed out the week yielding 0.7060%. On January 2, the 10-year was yielding 1.88%.
Equity market Leadership crippled
As if the bigger picture wasn’t jumbled enough, recent leaders provided a mixed picture as well last week. For example, Shopify (SHOP) dropped $26.15, or 5.25%, on Friday. That sharp pullback was delivered on a significant uptick in volume (+27%). Mastercard (MA) slipped $3.72, or 1.28%, as volume surged 52%. Nvidia (NVDA) dropped $7.25, or 2.65%, on a 16% increase in volume. Tesla fell $21.06 points, or 2.92%, on Friday, though volume did decelerate by 39%. Any equity that has provided leadership on the intermittent daily or intraday rallies that have taken shape in recent trading sessions have quickly surrendered their leadership in rather brutal fashion. We remain in a confirmed correction – obviously.
Flickr photo: Rod of Asclepius on World by Mark Morgan Trinidad B