All of the action over the past few weeks has culminated to what we had on Monday. It was pure mayhem in the stock market today, as equities plunged and oil wiped out, while bonds and volatility scorched higher.
At its lows, the S&P 500 sank 8%, while crude oil fell more than 33% at its lows.
Bonds soared on the day, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) ripping higher by 7.8% at one point and hitting new highs while yields continue to plunge. It’s worth pointing out that the TLT finished higher by just 2.7%.
Finally, the CBOE Volatility Index (VIX) jumped 30.8% on the day and closed at $54.84. The S&P 500, Dow Jones Industrial, Nasdaq Composite and Russell 2000 exchange-traded funds were our Top Stock Trades for Tuesday. Have a look.
What Is Going On?
Okay, so we have the obvious catalyst, which has been the coronavirus from China. But we can’t use the virus as a cover-all for the market’s hysteria. Scary as the headlines have been, it doesn’t get us to a $50-plus VIX on its own.
We also have the intense rally in bonds (and subsequent fall in rates) scaring investors. Then there’s the Federal Reserve stepping up its efforts in the repo market. Now, a lot of investors struggle to connect the dots in this area, and admittedly, it’s not easy. But when things get hairy and complex, that’s when many take a step back, sell now and ask questions later.
Oil and stocks can often be linked together too, and this is another area driving some chaos. Oil was the so-called canary in the coal mine. It was under pressure as supply kept a firm lid on prices. But once demand started to take a hit due to the softness in China, then things really got ugly.
OPEC wanted a production cut, and Russia wasn’t having it. Now, Saudi Arabia is in an all-out price war, flooding the market with supply and crushing the price of oil. It’s going to have a nasty impact on small- and medium-sized oil and gas companies around the world. Particularly those that are loaded with debt and need $45-plus oil to break even.
Granted, many are hedged to some capacity, but those hedges only last so long. It’s got the high-yield credit market screaming and concerns about a breakdown in that department are having a ripple effect across the stock market.
So, in so many words, it’s all connected, it’s all complicated and above all else, investors are selling first (or perhaps being liquidated) and asking questions later.
Movers in the Stock Market Today
Before going any further, I have to point out some relative strength. Last week, Walmart (NYSE:WMT) closed higher by more than 8%. It also closed higher on Friday and was flat on Monday. It’s above the 50-day and 200-day moving averages too. Just something to watch.
Willis Towers (NASDAQ:WLTW) fell 7.5%, while Aon (NYSE:AON) dropped 16.7% after the two announced a $30 billion all-stock merger. The one time investors were hoping for an M&A rally would have been today, but the two couldn’t deliver.
The banks are suffering as rates plunge, and because they are notable lenders to the energy sector, they are suffering from the decline in oil too. Some of investors’ favorite from the group include JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). All four are down between 33% and 40% from their 52-week highs.
Inovio Pharmaceuticals (NASDAQ:INO) is one of the few stocks that has been unstoppable over the past six weeks. However, shares plunged as Citron Research warned that the company should be investigated by the U.S. Securities and Exchange Commission after making “dangerous” statements. Shares closed lower by 30%.
Concern is mounting in the cyclical stocks, with automotive stocks plunging on Monday. General Motors (NYSE:GM) and Ford (NYSE:F) dropped to new 52-week lows. Ford now sports a $5-handle and a dividend yield that tops 9%.
Ferrari (NYSE:RACE), Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), Honda Motor (NYSE:HMC) and Toyota (NYSE:TM) all declined in the session, but have avoided hitting new annual lows for now.
As for a few analysts calls, Baird upgraded American Express (NYSE:AXP) to “buy,” as shares hit new 52-week lows on the day.
SunTrust had a slew of downgrades in the energy sector on Monday. The list spanned Apache (NYSE:APA), Chesapeake Energy (NYSE:CHK), EOG Resources (NYSE:EOG), Occidental Petroleum (NYSE:OXY) and Marathon Oil (NYSE:MRO). Although, downgrading on Thursday or Friday would have been a lot more helpful.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long C.