Future Shock

Future shock.  Stocks sold off for a second straight day as investors remained fixated on the rapidly slipping price of crude oil. Earnings are all over the map but most, not all companies agree that these are tough times, indeed.

N O T E W O R T H Y

The old salt says.  Perhaps it is because I was lucky to be brought up near the sea, or maybe it is the fact that there are so many rich tales that emerge from sea-bound travelers that I often find myself turning to it to convey a thought or to add color to a conversation. Given the recent market volatility, it is all too easy to use the trite rough seas theme but the fact is I just can’t avoid it.  There are waves, big and small.  There is chop and there is just plain: rough seas.  Let’s start with waves. Waves go up and down, usually in some sort of a recognizable pattern.  The economy, the stock market, and even fashion all generally follow a wave pattern, cresting and then pulling back into a valley.  I say “generally" because the length of the waves (wavelength) and their heights (amplitude) is hard to forecast, but the pattern always holds true. In 2019, a prominent investment theme was to attempt to predict when the current economic expansion would crest and pull back.  It had, after all been one of the longest economic expansions on record.  Similarly, we often talk about the stock market making new highs, pulling back to consolidate, only to rise again to a new crest.  Once again, though we know that markets follow this general pattern, timing them out and attempting to profit from them is no easy task, and more often than not unprofitable.  Long term, methodical investing provides the best results allowing us to take advantage of a longer-run secular growth trend.  The good news is that more and more investors are recognizing the benefits of a long term view, recognizing that attempting to time the markets is speculation, at best.  Enter: the perfect storm of the Coronavirus coming on the heels of a trade war, in the late stages of an economic expansion cycle, combined with a nasty price-war in one of the world’s most important commodities.  The result of all of these forces has caused volatility which would have been unimaginable just a few months back as markets closed off a positive 2019 and strode to new all-time highs in the new year.  In contrast to normal waves we have now entered some rough seas in uncharted territory.  In rough seas, there is no pattern to the chop and waves come from all directions. Uncharted, for sure, as economies around the globes are literally pausing while governments and central banks are launching unprecedented amounts of economic stimulus to keep their economies buoyant.  Stock markets rise rapidly on optimism only to retreat as good feelings fade.  Hard hit sectors lose value on weak prospects and rise violently at the first hint of positive news, only to fall back in the  following session.  The VIX volatility index topped off at 82 last month at levels not seen since 2008.  Thankfully the VIX has since pulled back into the low 40’s, which is still quite volatile by historic standards (the VIX has only traded above 40 four times since the financial crisis).  Rough seas are still with us and we are not yet through the storm, so I am turning to a tried and true method followed by sailors in rough seas. Focus your gaze on the horizon to avoid getting sea sick.  In real investing terms, we need to focus beyond the next two quarters to a period where many analysts are starting to believe will be a return to our regular secular growth pattern.  For investors not unlike sailors, this tried and true method is: long term focus and staying on course with a core investment strategy.

THE MARKETS

Stocks pulled back yesterday on mixed earnings, weak housing numbers, and a continued selloff in crude oil.  The S&P500 dropped by -3.07%, the Dow Jones Industrial Average fell by -2.67, the Russell 2000 slipped by -2.33%, and the NASDAQ Composite Index gave up -3.48%.  Bonds climbed and 10-year treasury yields fell -4 basis points to 0.56%.  Crude oil appeared to jump from negative to positive as the May contract expired and the June contract became the front contract.  That June contract fell by -43.4% to close at $11.57 / barrel yesterday.

NXT UP

- The FHFA House Price Index (Feb) is expected to have risen by +0.3%, same as the prior month.

- Crude Oil Inventories (April 17th) may have pulled back from 19.2 million to 13.9 million barrels. Traders will be watching this one closely in light of recent events.

- WHILE YOU SLEPT, the Senate approved a $484 billion relief package last night after reaching an agreement.  The bill goes to the House which is expected to vote on it tomorrow.

- This morning Thermo Fisher, Quest Diagnostics, and Delta Airline beat estimates.  We will hear from AT&T, Baker Hughes, Xilinx, Kimberly-Clark, Lam Research, and Biogen before the bell. After the close we will hear from CSX, Alcoa, Seagate, Discover Financial, Kinder Morgan, Las Vegas Sands, and O’Reilly Automotive.

daily chartbook 2020-04-22