Plummeting oil prices and a jump in coronavirus infections leaves stocks teetering on the edge of a bear market
This will be remembered as an historic day in the investment markets.
Stocks collapsed as investors panicked over crashing oil prices and the spreading coronavirus.
The selling pressure was so intense that stock trading was halted just minutes into the day. As I write mid-afternoon, the Dow and S&P are down more than 7% (Nasdaq down 6%).
The Dow and Nasdaq are now down 19% from record highs earlier in 2020 (the S&P down 18%). This puts stocks on the brink of a bear market, measured as a decline of 20% or more.
Below, you can see how close the S&P is at the time of this writing.
Panicking stock investors stampeded into Treasuries, pushing the yield on the 10-Year below 0.5% for the first time ever. Meanwhile, the 30-Year yield is now below 1%.
Gold passed $1,700, hitting a seven-year high. And the U.S. Dollar traded lower, hitting a 13-month low overnight.
***Stepping back, the coronavirus fears have been with us for weeks now, but what about oil? What happened over the weekend to trigger this meltdown?
Basically, it reduces to turmoil within OPEC (the Organization of Oil Exporting Countries). This past Friday, OPEC talks fell apart when the member-countries were unable to strike a deal involving oil production cuts.
In the wake of the impasse, Saudi Arabia slashed prices for its crude. This was seen as retaliation toward Russia, which had refused to cut its output in the earlier talks. This intensifying feud and the failure to reach agreement is leading to fears of a full-on price war that could crush oil investors and related-businesses.
As these fears spiked, Brent crude prices fell as much as 31% yesterday (Sunday) — that’s the largest single-day drop since the U.S. invaded Iraq in 1991.
Below, you can see the evolution of Brent crude’s price slide since the beginning of the year, going from almost $70 in early January, to almost $35 as I write.
Given the freefall in prices, oil companies are seeing their market caps decimated. This morning, our CEO, Brian Hunt, ran a screen tracking the rout in oil prices. The single-losses are historic.
ConocoPhillips was down 26%. Chevron, Exxon, and Shell were all down 14%. But the smaller players fared much worse. Schlumberger tanked 33%, Occidental down 42%, Marathon down 38% …
Now, if you’re wondering why a price war in oil is spilling over into the broader stock market, the answer has to do with credit defaults.
If the price of oil falls too low and remains at basement prices, then certain energy companies won’t be able to generate adequate revenues to cover expenses. This would eventually lead to defaults.
Defaults will hurt those banks that lent the money but can’t get it back. With reduced capital and more challenging market conditions, banks would likely tighten their access to credit for businesses of all types — beyond just oil companies. And that could slow growth and reduce profits, sending ripple effects through the broader economy and investment markets.
So, combine this with snowballing fears of the coronavirus, and you have an historic day in the investment markets.
What now? How should we view today’s events? For that answer, let’s turn to our InvestorPlace analysts.
***Neil George sees reason for caution in the credit markets
Neil updated his Profitable Investing subscribers this morning, making the same point as above about credit market concerns. From Neil:
… this is bringing in what I think is the bigger risk to the markets and the U.S. economy than the coronavirus — changing credit conditions.
The argument goes like this: If energy companies are squeezed and cashflows from operations are curtailed, then their ability to service debts will be in jeopardy. And if that happens, then lenders and financials as well as the bond market will feel the credit troubles.
But Neil notes that right now, the markets are acting on conjecture rather than facts. He suggests standing pat for now, as the Fed will likely be taking some sort of action very soon.
***John Jagerson and Wade Hansen don’t see reason to panic
In their Strategic Trader update, John and Wade noted that the markets and their safety mechanisms are working fine.
The drop in stock prices triggered a safety feature on Wall Street referred to as a “circuit breaker.”
When a sudden drop in stock prices triggers one of these circuit breakers, trading is halted for 15 minutes to give everybody a chance to take a deep breath, regroup and maybe unplug their trading algorithms for a bit … That’s exactly what happened this morning.
John and Wade then wrote that, while there will certainly be stocks that continue to fall in the weeks ahead, they expect to see recovery in a number of sectors. So, they’ll be looking for profitable trade-setups.
***Louis Navellier sees benefits for consumers thanks to the oil price war
This morning, Louis recorded a special market update for his subscribers in which he pointed toward a good piece of news:
The dramatic fall in energy costs is a boon for consumers. It means gas prices are going to fall … What’s going to happen is consumers will have more money in their pockets, and so this is good.
Louis then pivoted toward the effect this will have on interest rates. After noting how both the 10-year and 30-Year Treasuries are below 1%, he suggested the impact this will have on the Fed.
Right now, based on market rates, the Fed is going to have to cut three-quarters of a percent … You don’t want an inverted yield curve. So, these low rates are going to fuel a housing boom. So, this is very exciting. So, consumers have more money, housing should go up in value, so there’s some hope here.
As to “how to play this?” Louis says to wait.
What we want to see is real buying pressure emerge, and we want to see a decent bounce. But we’re not out of the woods yet. When you make a new low, you have to try to retest it. So, we still have to do that … Sometime next week will be the time to buy — not now.
***Matt McCall suggests thinking long-term
In Matt’s podcast update to subscribers, he noted how the VIX (a measure of market volatility, also known as the “Fear Gauge”) soared to 62.12. The only other time it has been this high was 2008/2009 and October 1987. Both instances presented great buying opportunities.
Matt also noted how the odds are incredibly likely the Fed will be cutting rates by 50- to 75-basis basis. This is very supportive long-term.
The U.S. economy was in good shape before the coronavirus hit and should be able to weather any brief slowdown. In addition, lower oil prices that are causing such panic today are actually positive for consumers. Add in low interest rates (that will undoubtedly go lower next week), and you have the strong likelihood that consumers will spend, especially with unemployment so low right now.
Finally, Matt suggests thinking long-term. Today’s market rout will not stop the 5G rollout … nor electric vehicles from taking market share … nor artificial intelligence from evolving …
Bottom-line, remember the big picture.
***Finally, Eric Fry sees opportunities coming
Eric’s update suggests level-headed thinking, while developing a plan to buy great stocks at discounted prices.
… stock market selloffs are the extreme events that create opportunity. They produce the panic selling and “washouts” that usually offer great moments to make savvy long-term investments.
“I will tell you how to become rich,” Warren Buffett famously remarked. “Be fearful when others are greedy. Be greedy when others are fearful.”
This sage advice seems so obvious when you read it in black and white. Yet it seems almost impossible to implement in the real world. That’s because when others are fearful, we are usually part of that group of “others.”
Next, though Eric recognizes the sell-off could get worse, he suggests using the current weakness to establish new positions or add to old ones. Of course, he recommends caution in doing so.
… I do not suggest throwing caution to the wind and making all your purchases at once. Instead, design a plan to purchase a specific selection of stocks over the span of a few weeks.
Initially, many of these purchases could produce poor results, if the market continues its downward spiral.
But if you are purchasing the share of dominant companies at today’s discounted prices, you will probably be patting yourself on the back one year from now.
As we wrap up, yes, today feels frightening. But longtime investors have seen this before, and markets have always come back and pushed higher — as evidence, the all-time highs from earlier this month. So, remain calm, keep a balanced perspective, and think twice before you make any emotional-based decision.
We’ll continue to keep you updated.
Have a good evening,