Massive Rally In Stocks & Treasuries Finally Fall

Another Huge Move In Markets As Stocks Surge

Wednesday had yet another awe-inspiring move in stocks and bonds as the S&P 500 rose 4.22% and there were many volatility clusters. However, if the market avoids another big decline, we will see a return to normalcy where stocks grind higher. The chart below shows how unusual the recent action has been. 

There were 4 losses of 3 standard deviations or more in 7 days. That matches the record high going back to the late 1920s. This is the 4^th such occurrence. There was panic on Wall Street last week which led to the rallies this week. However, the wild swings haven’t stopped. Let’s see if investors keep buying stocks on the hope the coronavirus doesn’t become a global pandemic.   

Good News On The Coronavirus

There were two good news items on the coronavirus. First was the House passed a $8.3 billion package of emergency funds to combat the virus. The fund includes more than $3 billion in vaccine research and $2.2 billion in prevention and preparedness efforts. This package is more than 3 times the $2.5 billion proposal the White House made last week. The bill passed the House 415-2. That’s great news because it means future emergency packages will have widespread support.

A second bit of good news is there were only 2,154 new cases outside of China on March 4^th which was down from 2,453. It's interesting that stocks rose on Monday and Wednesday which were both days in which the number of new cases outside of China fell. Countries outside of China now have 15.76% of the total. As I mentioned, this will hit 20% this week.

Bad news is according to the Johns Hopkins Chief Epidemiologist, 40% to 60% of the world population will get the coronavirus in the next 1-2 years with the number of cases peaking in the spring. There will be a vaccine in about 2 years. The true death rate is expected to be between 0.1% and 0.5%. 

If 40% of the world gets this and it kills 0.1% of the people who get it, the virus will kill 3.12 million people. If 60% of the world gets it and it kills 0.5%, then it will kill 23.4 million people. The Spanish flu infected as many as 500 million people. These are scary stats because the coronavirus has only killed 3,286 people.

Review Of Wednesday’s Monster Rally

Wednesday was another monster rally. This is the type of rally you see in bear markets and big corrections. When the market is riding high, it never increases more than 4% in a day. A 2% rally is a huge deal in bull markets outside of corrections. Nasdaq rallied 3.85%. 

Russell 2000 didn’t underperform by as badly as it did on Monday as it increased 3.04%. That’s likely because the long bond had a sharp selloff. VIX fell 4.83 points to 31.99. As you can see from the chart below, there has been an avalanche of put buying in the VIX which makes sense because it got way too high. That level won’t be maintained unless there is unprecedented volatility in the next few weeks.

The stock market was helped by Joe Biden winning the most states on Super Tuesday. This helped the IHF health insurance ETF rally 8.87%. United Health stock rose 10.7% which was its biggest 1 day gain in 12 years. CNN fear and greed index rose 5 points to 15 which is still extreme fear. If the coronavirus gets as bad as Johns Hopkins thinks, we could see a prolonged period where stocks underperform their average historical return. Every sector rallied on Wednesday. 

Best ones were healthcare, utilities, and consumer staples, which increased 5,81%, 5.69%, and 4.92%. The market was led by defensive names. The S&P 500 has been led by low volatility in greater than 4% rallies just 3 times. It happened March 2^nd, March 4^th, and October 20^th 2008. That’s it.  

Temporary Selloff In The Long Bond

The rally in the long bond has been continuous recently. As you can see from the chart below, the 2 week rolling change in the 10 year yield has only fallen more one other time in the past decade. JP Morgan states yields have fallen because the market has little depth. I prefer to say traders have panicked. 

10 year bond finally took a short break from its rally on Wednesday. After it hit 92 basis points, it rallied all the way to 1.06%. That’s a giant 14 basis point move intraday. However, the selling might not be over because the 10 year yield fell 5 basis points on Thursday morning.

Is 2020 Like 1998?

As you can see from the chart below, in both 1998 and 2020 refinancing activity spiked and jobless claims were low. Personally, I don’t think Russia’s default and the collapse of Long Term Capital Management are similar to the coronavirus though. 

Both were exogenous shocks, but the difference here is the Chinese economy is much more important to the global economy than Russia was in 1998. Plus, it’s possible the coronavirus becomes a global pandemic that kills millions of people over a 2 year span.

Conclusion

The stock market rallied sharply on Wednesday. Worst of the correction is over and that we will see a return to normalcy. However, the stock market will not likely hit a new record high in the next 3 months. Most traders will wait to see how bad the coronavirus gets. 

It’s tough to buy stocks aggressively when the U.S. economy might only growth 1.3% in 2020 and all earnings growth might be taken away. So I am downgrading my price target for the end of the year back to a 3% gain. Currently, the market is down 3.12% year to date. If cases pick up again in the fall or winter, we might see another correction.