Stock Markets Take Two Steps Forward, Three Steps Back

Stock market indices began the week with their largest percentage declines since the “Black Monday” stock market crash on October 19, 1987. Losses on Major Market Averages easily wiped out the record gains from last Friday, all posting record daily point declines.

The Bond Market was relatively calm. While the yield on the U.S. Treasury 10 year Note and 30 year Bond fell to 0.745% and 1.32% respectively, these are well above the record low yields from a week ago.

The Dow Jones Industrial Average (^DJI) fell nearly 3000 points, -2997.10 or -12.9% to settle at 20188.52, the lowest close for the Blue Chip benchmark since February 9, 2017, three months after the 2016 Presidential Election.

The S&P 500 (^SPX) settled at 2386.13 a loss on the day of a whopping -324.89 points or -12%. While a -13% decline would have triggered a second, or Level II Circuit Breaker, keep in mind that after 3:25 pm circuit breakers do not get activated and stocks are left to trade freely into the 4:00 pm close.  The S&P 500 close of 2386.13 was the lowest close since December 24, 2018 when the index closed at 2351.10.

The NASDAQ Composite (^IXIC) fell -970.28 points or -12.3% to close at 6904.59, the lowest close for the NASDAQ since January 8, 2018 when the index closed at 6897.00. As a point of reference, on December 24, 2018, the NASDAQ comp closed at 6192.92, over 700 points lower than yesterday’s close.

Oil prices added to the universal selloff in stocks as futures contracts for both Crude Oil WTI (WTI) and Brent Crude (CO) hit their lowest levels since the oil price shock from Saudi Aramco a week ago (feels like a month ago). WTI and Brent Crude traded below $30 and $32, respectively. The spread between the two shrank to less an $1 from approximately $4 the day after the price cut was announced.

I have to mention that the VIX volatility index, or the CBOE VIX, posted an all time high closing level of 82.7.  This eclipses prior highs from the 2008/09 Global Financial Crisis era.  I mention the VIX reluctantly, because It’s a terribly destructive product for market stability, and no one other than the most seasoned options and futures trading professionals should ever consider trading it.

The Bond Market Is a Sea of Calm

In contrast to the headline grabbing daily swings in the stock market, the Bond Market has been relatively calm. Since hitting record low yields a week ago Monday of 0.4% on the 10 year note and 0.9% on the 30 year bond, not even yesterday have bond yields come close to threatening those record low yields.

The Bond Market is many multiples larger than the Stock Market, even with the constant appreciation we’ve seen in equity values over the last few decades. The Bond Market is also infinitely more homogenous, with the U.S. Treasury Bills, Notes and Bonds being the benchmark that all sovereign and corporate debt is referenced to.

With all due respect to equity investors, the Bond Market has a long established track record of being a bit smarter than the stock market. The price action over the last 6 trading days may be telling us that bonds reached “Peak Panic” last Monday.

Stocks on the other hand are still in the process of “resetting” valuation levels to both the unknown economic implications from the Coronavirus and oil prices at a 25% to 30% discount to the last 5 years.