Key points to remember:
- The wage bill increased by 273,000 in February against 170,000 consensus
- Ten-year Treasury yield drops to new historic low below 0.7%
- The Dow Jones Industrial Average is on the way to decline for the 7th consecutive Friday
Despite a better-than-expected employment report, it still doesn’t look like investors want to take as much risk over the weekend.
The government’s report on the non-farm payroll in February came well beyond expectations with an impression of 273,000 when only 170,000 were expected in a Briefing.com consensus. Although concerns about the coronavirus increased in February, it seems that companies have picked up, at least in terms of hiring. However, it remains to be seen whether this trend will continue in the March report.
A strong job market has been a key element in the willingness of domestic consumers to go out and spend money. Continuing this action would be essential to help the US economy cope with the worsening coronavirus epidemic. But if the epidemic worsens in the United States, this trend may begin to weaken.
This is one of the things that seems of particular concern to investors amid the fallout from the coronavirus, and this morning, as they continued to avoid stocks even after the employment report, investors continued to buy of the US government debt. Before the employment report was published, the 10-year Treasury yield had fallen to a new historic low of less than 0.7%.
If the Dow Jones Industrial Average ($ DJI) ends lower today, it will be its seventh consecutive closing Friday. But something to consider during the day is whether the S&P 500 (SPX) is capable of pushing back the 2940 level.
Market roundup (or should we say rounddown?)
Yesterday was another ugly day on Wall Street because it seemed like market participants were staying away from risk as much as possible.
Shares fell dramatically at times on Thursday, but the main indices ended slightly behind and the SPX closed above the psychological level of 3000. It’s a small victory, but it doesn’t seem like a big party if we consider that the closing is 3.3% higher than that of Wednesday. Major Indices have finished up or down 3% or more in six of the last 10 sessions.
The sense of risk has melted in oil, which has diminished despite the possibility of a reduction in OPEC production if Russia agrees. The risk mood apparently prompted the purchase of gold and US government debt, with the 10-year Treasury yield remaining below 1% and even reaching an all-time low of 0.9%. The bond market looks overbought, but its extreme moves could also be an indication that we may have a harder time going before things get better.
In addition to news from California declaring a coronavirus state of emergency, market participants appeared to be focusing on the International Monetary Fund (IMF) announcement that global growth this year will be less than 2.9%. last year and the International Air Transport Association’s prediction that airlines could lose $ 113 billion if the outbreak continues to spread.
Meanwhile, Apple (AAPL) has joined other prestigious companies to cancel its plans to participate in the South by Southwest music and technology festival. Southwest Airlines (LUV) said it expects first-quarter sales affected by the virus. Hotel and airline stocks continued to be affected. All of this leads to a snowball effect amid fears that the American consumer – who was a key player in the continuation of the rally for much of last year during the long trade war – may back off.
Some rays of light, but we’re still in the woods
While investors and traders generally seem to be focusing on the negative, there have been some positives to consider this week. These include the surprise Fed rate cut, the IMF’s announcement of a $ 50 billion aid package, and news that Congress passed an 8.3 emergency spending package. billion dollars to combat the spread of the virus.
Another positive sign: despite the pain of this current decline, the sale was somewhat orderly.
However, the VIX climbed to 48 on Friday morning. And don’t be surprised if VIX stays above 30 for a while. It could take a month or two to bring things back to a more normal type of market, if the trends in history continue.
Despite the brighter points, this does not seem to be a good sign that “defensive” sectors like public services and real estate have led rallies while cyclicals, in particular financial services, lead to a decline in days like today. It will be very difficult to have a sustained rally if financial services – the second largest SPX sector – continue to be shelled.
Financials are likely to remain under pressure until the performance picture begins to improve. Right now, there is a lot of red in the returns as investors continue to crowd the bond market. However, we are seeing signs of improvement at the epicenter of the virus – China – where people are starting to return to work and where actions on the continent have rebounded. Despite a moderate liquidation on Friday, the Chinese market went in a solid week to almost record highs. It might be helpful to think that China is three weeks ahead of the rest of the world in terms of the spread of the virus.
Would the sale have taken place anyway? In another reality where COVID-19 did not occur, we could have seen a correction anyway. The market had become extremely overbought and overvalued by mid-February, according to investment research company CFRA. “The fix was looking for a catalyst,” said CFRA. “The coronavirus answered the call.” But CFRA does not see the correction turning into a bear market. “We continue to see an economic slowdown rather than a recession, which would limit the carnage to a correction rather than a new bear market,” said CFRA.
Coronavirus is not a catch-all: It is tempting to look at disappointing data now and blame it for the virus, but it is not necessarily that. For example, factory orders fell 0.5% in January, worse than the 0.1% drop analysts expected, Briefing.com said. Coronavirus does not seem to have had much impact on January figures because China did not really start restricting travel until late January, which was already expected to be slow due to the break Chinese Lunar New Year. The United States was not in crisis mode in January, and national economic data at the time seemed fairly solid. In addition, the stock market only really started to respond to the viral threat last month. So it looks like we’ll have to wait until next month to see if, or to what extent, the epidemic could affect factory orders in the United States.
The service sector is moving smoothly: Factory orders follow manufacturing, which accounts for only 11% of the economy and is not necessarily representative of what the remaining 89% does. Despite pervasive concerns about the coronavirus, a recent review of the non-manufacturing part of the economy has been largely positive. The February non-manufacturing index for the Institute for Supply Management rose 1.8 percentage points to 57.3%, outperforming the 54.8% expected in a Briefing.com consensus. Although most of the respondents are concerned about the coronavirus and its impact on the supply chain, they remain positive about business conditions and the global economy, said ISM. “The main lesson from the report is that the number of February is encouraging in itself, but with the increase in the number of cases of coronavirus in the United States and the attention of the public to contain it, doubts persist that the force can be maintained, “explained Briefing. said com.
TD Ameritrade® Commentary for educational purposes only. SIPC member.