When markets go pear-shaped we inevitably end up with a raft of topics we want to discuss with you. Therefore, we’ll go with a list of short form items today:
#1: Yesterday’s selloff doesn’t signal a reliably profitable entry point:
- 3-handle percentage declines for the S&P 500 (like yesterday’s 3.4% drop) are not that unusual.
- Last August, Jessica noted in a “Data” section report that there have been 100 instances of 3.X% daily declines back to 1958 (i.e. when the S&P 500 went live). That’s over 1 per year, in other words.
- You need a +4% one day decline, which has happened less than 50 times since 1958, to give you decent odds of a gain over the next year.
Bottom line: we’ll come back to you with the detailed analysis if/when a 4% day materializes, but for now just know this is the number to look for.
#2: With all the recent focus on retail investors piling into cult stocks, we wondered what they were doing yesterday so we pulled up Fidelity’s daily “most traded” list at the close:
- The bottom line is that retail investors were buying long exposure – not selling – yesterday.
- The ratio of buy/sell orders for the 10 most heavily traded names:
- First 5: Apple (2.4x), Microsoft (2.1x), Tesla (1.7x), Amazon (1.8x), AMD (1.8x).
- Next 5: Virgin Galactic (1.1x), NVIDIA (1.5x), SPY (2.4x), TQQQ (3x daily QQQ return, 1.8x), and TVIX (2x daily VIX move, 0.8x – unwinding hedges).
Bottom line: if retail selling is the sign of a washout for equities, yesterday does not qualify.
#3: We’ve been tracking Chinese traffic congestion to see if/when the government would start pushing the population to go back to work, and Monday (yesterday) was that day.
- Beijing traffic congestion was 2x higher than last week, as was Shanghai’s.
- In Tianjin, traffic levels also rose from last week.
- Shenzhen’s Monday morning commute was as congested as any typical day in 2019.
Bottom line: whether the Chinese government’s efforts to restart the economy are wise remains to be seen, but the process started in earnest today.
#4: No surprise, but today Fed Funds Futures dramatically increased the odds of rate cuts this year:
- April 2020 Futures broke out to a new 2020 high, with 55% odds rates will be lower than today.
- June 2020 contracts also broke out and now put 75% odds that Fed Funds will be lower than today.
- December Futures contracts now give 95% odds the Fed will cut rates in 2020, with the most likely outcome being 50 basis points lower than today (31% odds).
Bottom line: Fed Vice Chair Clarida’s 3:15pm speech today at the NABE conference in Washington just became must-see TV. The title of the talk leaves little doubt Fed speechwriters are struggling with the text right now: “US Economic Outlook and Monetary Policy”.
#5: As much as the Fed gets grief for providing a free market “Put”, on days like today it pays to remember that Americans watch stock prices more closely now than even back in 2008. Here is the Google Trends chart of search volume for “dow jones” (the most common stock-related online query) from 2004 – present:
Bottom line: even if most Americans do not own stocks, they know that equity market volatility correlates with personal job security and US economic stability. As we outlined in our “Markets” section of our full report, we’re late into an economic cycle and the US economy needs stable consumer confidence to keep the wheels on the expansion. Keeping equity market volatility in check helps that. Days like today do not help.
Chinese Traffic (Beijing and others): https://www.tomtom.com/en_gb/traffic-index/beijing-traffic
Fed Funds Futures: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html