Stocks’ Covid Angst Takes Violent Turn After Simmering for Days
(Bloomberg) -- First the animal spirits left the building. Now everyone’s heading for the exit in the stock market.
It’s a story that has been brewing under the surface for days: simmering skepticism that the coronavirus crisis was anywhere near under control. Conspicuously, starting a couple weeks ago, automated tech stocks were back on top -- a reliable sign of worry among an investor class that earlier this month was willing to buy anything it saw.
On Wednesday, uneasiness morphed into fright. By noon, the S&P 500 had plunged 3%, after data showed virus cases spiking in Florida and Texas. New York, Connecticut and New Jersey said visitors would face a mandatory quarantine.
The change is a marked shift from the spirit that ruled as recently as June 8, when the S&P 500 turned positive for the year, leaving its pre-pandemic high the only milestone left to breach. Now that date is shaping up as a possibly sinister landmark -- the day worries of a second wave became a reality, a concern that is increasingly difficult to dismiss.
“The latest coronavirus news is not positive for the stock market which was betting the worst of the pandemic recession was behind us,” said Chris Rupkey, chief financial economist for MUFG Union Bank. “Hopes of investors looking for a better economy to improve the bottom lines of companies shut down in the recession have been dashed.”
The S&P 500 fell 2.7% as of 1:43 p.m. in New York, after the International Monetary Fund downgraded its growth outlook for the world economy and data showed California had a record 7,149 new cases. An equal-weight version of the index that gives all members the same significance was down 3.3% while the Nasdaq 100 dropped 2.1%, the least of the major benchmarks.
Divergences like that have been common in recent days, even when equities were rising. All of the sudden, so-called stay-at-home stocks were leading the market, while cruise lines and airlines struggled anew. The Nasdaq 100 notched a new high versus the S&P 500 as investors gravitated toward large companies with strong balance sheets. After weeks when investors applauded widening equity participation, they began to fret the pace couldn’t continue.
The rally was getting more concentrated -- hearkening to days in March and April when the market’s contour reflected a belief that companies that thrived in a stay-at-home economy were the only ones to own. Through Tuesday’s close, the Nasdaq Composite Index, a de facto proxy for this appetite, had gained for eight straight days, the longest winning streak of the year. At the same time, less than 45% of stocks in the S&P 500 has reclaimed their average price over the last 200 days. According to Sundial Capital Research, such a discrepancy hadn’t materialized since 2000.
Sundial analysts also highlighted that while many index components hadn’t breached their trend-lines, the broader S&P 500 was trading well above its 200-day moving average as of Tuesday. The only other times the gauge traded above the mark and fewer than 45% of its members did simultaneously were 2007 and 1999 -- neither of which are years that evoke fond memories for investors.
At the same time, on top of worries about the spread of coronavirus, markets are now facing a variety of policy uncertainties, including an upcoming election and the potential imposition of tariffs, according to Brian Nick, chief investment strategist for Nuveen.
“That’s a lot to cope with for a market that is still relatively fragile, is back to a relatively narrow leadership,” Nick told Bloomberg Television. “Staying sort of growth-y, defensive, high quality, avoiding sort of existential risk when it comes to sort of these longer-impacted Covid-related industries is still the way to go.”
Wednesday afternoon, an equal-weight gauge of stay-at-home stocks that includes Zoom Video Communications Inc., Lowe’s Companies Inc., and General Mills Inc. was down a relatively modest 1.8, data compiled by Bloomberg show. Meanwhile, an index representative of the winners in a reopening, including airlines, hotel operators and cruise lines, plunged more than 6%. Small companies bore the brunt of the selling, with the Russell 2000 down 3.7%.
There were signs exchange-traded fund investors were already on edge in recent days, shunning products that should outperform in a strong economic recovery, while running back to safety. They swapped small and mid-cap focused funds for the security of large-cap ETFs. The value style also looks to be losing its allure at the behest of growth.
So far this week, investors have poured $3.9 billion into the SPDR S&P 500 ETF Trust (ticker SPY) after two weeks of outflows. The SPDR Portfolio 500 Growth ETF (SPYG) has taken in $472 million, on track for the fund’s largest weekly inflow on record.
At the same time, the iShares S&P SmallCap 600 Value ETF (IJS) has lost $137 million, on track for its worst week in over a year, while the Schwab Fundamental U.S. Small Company Index ETF (FNDA) has lost more than $200 million.
Particularly worrisome to investors is the reality that nowadays, it seems easier for stocks to get spooked than it did, say, two weeks ago. If the fastest 50-day rebound on record is now reverting to alarm, there’s reason to wonder what equities -- a forward-looking mechanism -- see in an economic rebound now.
“You’re seeing the market say OK, it’s been a great run, now we have factors coming into the market suggesting we could see selling,” said Quincy Krosby, chief market strategist at Prudential Financial Inc. “That’s what you’ve got right now.”
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