Multiple rate cut expectations describe the panicky sentiment

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Commenting on today’s trading in which panicky sentiment led markets lower, Gorilla Trades strategist Ken Berman said: 

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Q4 2019 hedge fund letters, conferences and more

A Panicky Sentiment On The Street

Fears of a full-blown global epidemic and its possible effects on the economy led to a perfect storm on Wall Street. The risk that Europe might soon see China-like lockdowns due to the virus was enough to cause a downward spiral in stocks, and the fact that the Volatility Index (VIX) was up by almost 50% today, well describes the panicky sentiment on the Street.

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The major indices had their worst day in years, as the coronavirus outbreaks outside of China caused a global exodus out of risk assets, with stocks virtually giving up all of their year-to-date gains. The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 1032, or 3.6%, to 27,961, the Nasdaq (INDEXNASDAQ:.IXIC) lost 355, or 3.7%, to 9,221, while the S&P 500 (indexsp:.inx) fell by 112, or 3.4%, to 3,226. Decliners outnumbered advancing issues decliners by a more than 9-to-1 (!) ratio on the NYSE, where volume was way above average. 

The key risk-on sectors all fell by more than 3% today, and while the materials and tech stocks lost the most ground. Correlations were sky-high across the board in this environment of panicky sentiment. Even the defensive utilities sector finished the session in the red amid the widespread liquidations while Treasuries saw major safe-haven inflows. Airliners and semiconductors were in the epicenter of the selloff, due to their exposure to the crisis, but the major indices all hit multi-week lows, and relatively weak Dow hit its lowest level since mid-December.

Bond Traders Expect Two Or Three Rate Cuts

While the bullish long-term trends are clearly intact in stocks, the bond market is ‘pricing in’ a significant economic downturn. The price of oil fell by more than 4% as well, while gold closed at a seven-year high despite a late-day selloff.  The 30-year yield hit a new all-time low today, and 10-year yield also got close to its record low as investors flocked into the safety of Treasuries. According to today's prices, bond traders expect two or three rate cuts by the Fed this year, and that seems far from the Central Bank's plans, confirming the panicky sentiment.

The real economic impact of the epidemic is still unclear, despite today’s mini-crash in stocks, and while the U.S. wouldn't stay immune to a sharp global downturn, the domestic economy remains strong. The manufacturing sector has been showing signs of recovery in recent weeks while the consumer economy remains stable. The industries that have the highest exposure to global trade could suffer a major, but hopefully short-term hit, but domestic-focused firms could outperform even in the more bearish scenarios.

We will have an action-packed session in terms of economic releases tomorrow, with key indicators coming out from the housing market, the manufacturing sector, and the consumer economy. The CB consumer confidence number is expected to edge higher in the face of the coronavirus scare, but the Richmond Manufacturing Index is forecast to drop to 10, despite the recent improvements in the sector. The Case-Shiller Housing Price Index is expected to rise, both on a monthly and yearly basis, and with last week’s strong readings in mind, growth in the sector could even be gaining momentum. Stay tuned!