After an agonizing selloff in stocks last week, where equity markets entered correction territory in their worst weekly performance since the 2008 financial crisis, stocks are recovering some of their losses today, as markets pin hopes on the Federal Reserve stepping in to help.
After showing a more than 10% loss last week, the Dow Jones Industrial Average climbed over 775 points higher, or 3% higher before paring some gains. The S&P 500 and the Nasdaq Composite rallied 2.7% apiece.
Equities pulled back from their highs for a short time after an important dimension on the U.S. manufacturing marked a slowdown last month. The ISM manufacturing index fell to 50.1 in February, the lowest level since the end of 2019, falling below an estimate of 50.8.
Stocks were rocked last week as the coronavirus panic gripped markets, with investors fearing a global contagion, which seems to be in the works. The number of coronavirus cases continued to climb over the weekend, both inside and outside the U.S.
“The outbreak of Covid-19 has certainly changed the near-term narrative,” said Chetan Ahya, global head of economics at Morgan Stanley, in a note to clients Sunday. “It is an untimely shock, considering that the starting point of global growth was weak, and the recovery was very nascent.”
As of Sunday, over 89,000 cases have been confirmed around the world including more than 3,000 virus-related deaths. Australia, Thailand and the U.S. reported over the weekend their first coronavirus-related deaths.
In addition, a private survey on Chinese manufacturing activity released during Asian trading hours on Monday showed the sector at its worst level to date. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) notched a 40.3 for February, a far cry from expectations of a reading of 45.7 by economists in a Reuters poll. PMI readings above 50 indicate expansion, while those below that level signify a contraction.
The plunge “shows the extent to which an outbreak can hit an economy,” said Ed Hyman, a widely followed economist on Wall Street and Evercore ISI chairman, in a note to clients. “All this is quite uncertain, and we may be overreacting. But we also don’t want to underreact.”
It appears therefore that stocks are eagerly anticipating the Federal Reserve to come to the rescue, as the CME Group’s FedWatch tool shows traders are looking for a 100% probability of a 50 basis-point rate cut later this month. Expectations for another rate cut in April are around 70%.
“The ultimate risk factor in our view is the U.S. consumer,” said Gregory Faranello, head of U.S. rates trading at AmeriVet Securities. “We have coronavirus cases showing up in the U.S. To the extent that that continues to spread, which we all hope will not be the case, the risk factor for the Fed grows because this now is no longer something that they can point the finger to relative to tariffs and say the global economy is slow, but we’re okay.”
While markets are chartering uncertain territory right now, in the event that volatility does start to compress, investing in stocks once again using time-tested ETFs like the SPDR S&P 500 ETF Trust (SPY), the SPDR Dow Jones Industrial Average ETF (DIA), and the Invesco QQQ Trust (QQQ) is one simple way to play the long side.
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