Commenting on the outbreak’s impact on stocks and today’s trading Gorilla Trades strategist Ken Berman said:
Stocks ended their historic four-month winning streak in February, as the spreading coronavirus outbreak wreaked havoc across the key risk-on sectors. While the epidemic was already making headlines at the beginning of the month, it really started to have an impact on stocks in the last week of February. The major indices got crushed as the epidemic went global and the odds of containing it fell. Equities not just erased their year-to-date gains over the course of a few sessions, but the short-term technical damage has also been substantial. The widespread lockdowns and the deteriorating outlook for the global economy weighed on corporate profit expectations, and more and more firms have been warning of a possible ‘lost quarter’.
Q4 2019 hedge fund letters, conferences and more
At the 2021 SALT New York conference, which was held earlier this week, one of the panels on the main stage discussed the best macro shifts coming out of the pandemic and investing in value amid distress. The panel featured: Todd Lemkin, the chief investment officer of Canyon Partners; Peter Wallach, the managing director and Read More
While almost all of the key sectors finished the month in the red, there were meaningful divergences between them, according to their exposure to the Chinese market and the outbreak itself. The energy sector was the biggest negative outlier, due to its leverage on global growth and trade with the price of crude oil also hitting a one-year low. Hotels, resorts, and cruise liners weighed on the consumer discretionary sector, while consumer staples, utilities, healthcare stocks, and communication servrces held up relatively well due to their defensive nature and lower-than-average exposure to the outbreak. Financials suffered because of the plunge in Treasury yields that pushed the long-end of the yield curve to record lows, but real estate firms outperformed the broader market for the same reason.
Chipmaker Nvidia (NVDA, +6.8%) was among the few large-cap companies to finish the month in the green despite the plunge, together with T-Mobile (TMUS, +11.7%) and Sprint (S, +104%) which were buoyed by the court approval of their planned merger. The energy sector’s apocalyptic month led to double-digit losses across the board, with even the likes of ConocoPhillips (COP, -22.2%) and Exxon (XOM, -21.7%) being hit especially hard due to their global exposure.
Losses were more uniform among the main capitalization groups, since the difference in the exposures to the outbreak is much more pronounced at the level of sectors and industries, That said, small-caps (-8.5%), and micro-caps (-7.2%) were hit somewhat harder due to the global risk-off shift and the new all-time lows in Treasury yields which both increased demand for large-caps (-7.1%) and especially mega-caps (-7.9%). The fact that larger companies tend to have a bigger global exposure led to steep losses among mid-caps (-5.8%), which were less supported by the lower-yields, while nano-caps (-4.2%) were surprisingly strong thanks to their relative strength in the first half of the month.
The Positive Impact Of Bullish Surprises
While investors started to ignore the key economic releases towards the end of the month, as the worrying coronavirus-related developments outweighed even the positive forward-looking measures, the bullish surprises could still have positive long-term impact on stocks. The ISM manufacturing and non-manufacturing PMIs both beat the consensus estimates, just as the Philly Fed Index, the Michigan consumer sentiment number, durable goods order, and non-farm payrolls. The housing market also sent positive signals in February, but the Markit manufacturing and services PMIs, the Richmond Manufacturing Index, and the CB consumer confidence number were surprisingly low. Inflation remains tame, despite the higher-than-expected Producer Price Index (PPI), so the Fed is highly unlikely to hike interest rates anytime soon.
The deepest pullback in stocks since late-2018 could continue this month as the key short-term trend indicators turned bearish for the first time since October, but the bullish long-term trend remains intact on Wall Street. That said, volatility will likely remain elevated until the virus-related uncertainty stays high, even though the extreme market conditions we saw in the last week of February are unlikely to persist. All eyes will remain on Treasuries and gold since demand for safe-havens is expected to remain high, and that could mean that the divergence between the key sectors will even widen. The selloff already created bargains, and while stocks were ‘overbought’ in the wake of the strong rally from October to the end of February, bulls might soon be able to choose from a slew of buying opportunities in the wake of the panicky liquidations. Stay tuned!