Stocks Bouncing Back After Monday's Sharp Stumble

 

U.S. stocks are rebounding from Monday's tumble, amid increased expectations of a fiscal policy response to the coronavirus outbreak may be in the offing, with President Donald Trump set to hold a press conference after today's close. Crude oil prices are also recovering from yesterday's plunge with Russia suggesting it may be open to resuming talks with Saudi Arabia, which boosted production in reaction to Russia's resistance of OPEC's proposed production cuts last week that ignited an oil price war and pummeled the energy sector. Treasury yields are recovering solidly from a recent tumble to all-time lows and the U.S. dollar is trimming yesterday's drop, with small business optimism ticking higher in February. Gold is trading lower. Dick's Sporting Goods is rising on the heels of its earnings report, which included a dividend increase, but Delta Air Lines announced capacity cuts and Stitch Fix lowered its full-year guidance. Asia recovered and Europe has turned mixed as coronavirus uneasiness remains in the region.

    

At 10:53 a.m. ET, the Dow Jones Industrial Average is up 1.3%, the S&P 500 Index is gaining 1.6%, and the Nasdaq Composite is rising 1.9%. WTI crude oil is advancing $1.82 to $32.95 per barrel, Brent crude oil is increasing $2.45 at $36.81 per barrel, and wholesale gasoline is $0.02 higher at $1.16 per gallon. The Bloomberg gold spot price is down $18.80 at $1,656.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is rebounding 1.0% at 95.87.

 

The stock markets, crude oil prices, Treasury yields and the U.S. dollar are all recovering some of yesterday's decisive tumbles that came as the amplified economic and earnings uncertainty regarding the spreading of the coronavirus was met with a crash in oil prices as a price war erupted after Saudi Arabia pledged to boost production on the heels of Russia's resistance of OPEC's proposed production cuts. The rebound is being fostered by Russia not ruling out the resumption of talks with Saudi Arabia, and President Donald Trump announcing plans of talks with Congress regarding fiscal support, including the possibility of payroll tax cuts and relief for hourly wage earners and travel-related industries affected by the turmoil, with a press conference set for after the market close. Also, expectations are running high that the Fed and other global central banks may deploy further stimulus measures after the Fed's surprising 50 basis point (bp) rate cut last week and ahead of this week's monetary policy decision from the European Central Bank (ECB).

      

Schwab's Chief Investment Strategist Liz Ann Sonders provides a look at the recent turbulence in the markets in her latest article Manic Monday (Tuesday, Wednesday, Thursday, Friday), noting that the economic implications of COVID-19, and now the crash in oil prices, are significant enough to make a recession likely. She stresses that in the meantime, our advice to investors hasn't changed. For the past couple of years—given our perspective that we were entering the latter stages of the cycle—we have been pounding the table on diversification (across and within asset classes) as well as periodic/systematic rebalancing. Liz Ann adds that those tried-and-true disciplines are the closest thing an investor can get to a "free lunch" in this crazy business.

 

Dick's Sporting Goods Inc. (DKS $36) reported Q4 earnings-per-share (EPS) of $0.81, or $1.32 ex-items, versus the $1.22 FactSet estimate, as revenues rose 4.7% year-over-year (y/y) to $2.6 billion, roughly in line with the Street's expectation. Q4 same-store sales rose 5.3% y/y, versus the projected 3.2% gain. The company issued current-year guidance that was just shy of analysts' forecasts, noting that its outlook balances the enthusiasm it has for its business with the rapidly evolving coronavirus situation. DKS also announced that it is increasing its quarterly dividend by 13.6% to $0.3125 per share. Shares are rising.

  

Delta Air Lines Inc. (DAL $43) announced that it is reducing international and domestic capacity to address the impact of the COVID-19 outbreak, joining similar measures reported by other major airlines, including United Airlines Holdings Inc. (UAL $49) and American Airlines Group Inc. (AAL $15). DAL is trading lower. 

  

Stitch Fix Inc. (SFIX $15) is falling more than 25% after the company lowered its full-year guidance, after posting Q2 EPS that topped forecasts but revenue that came in a bit lighter than expected. The online personal styling service said it saw healthy active client growth in Q2, but due to heightened promotional activity across retail and macro themes, clients spent less on average and it is leaning more conservatively in the back half of 2020.

  

Small Business optimism ticks higher, yields rebounding

 

The National Federation of Independent Business (NFIB) Small Business Optimism Index for February improved to 104.5, from January's 104.3 level, in line with the Bloomberg expectation. The NFIB said small business owners remained optimistic in February, with those expecting better business conditions increasing and job creation and openings improving as well, while real sales expectations declined along with capital expenditure and inventory plans. The NFIB added that February was another historically strong month for the small business economy, but it's worth noting that nearly all of the survey's responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. The survey concluded that business is good, but the coronavirus outbreak remains the big unknown.

 

Treasuries are giving back some of yesterday's intensified rally, with the yields on the 2-year and 10-year notes gaining 9 bps to 0.41% and 0.59%, respectively, while the 30-year bond rate advancing 10 bps to 1.03%. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the bond yield environment in her article, After the Fall: Why You Should Hold Bonds Even When Yields Are Low, noting that historically, there has been no better hedge against an equity market decline than long-term Treasury bonds. 

 

For our analysis of how investors can deal with wild market swings, check out the Schwab Center for Financial Research's article, Market Volatility: Here's What You Should Know, as well as Chief Investment Strategist for Schwab's digital advice solutions, David A. Koenig's, CFA, latest commentary, Weathering Market Downturns: How Schwab Intelligent Portfolios Can Help. David notes that financial markets are volatile by nature, but a diversified portfolio aligned with your goals and risk tolerance—like one built and monitored by Schwab Intelligent Portfolios—can help smooth returns over time.

 

Europe mixed but key markets are recovering from yesterday's rout 

 

European equities are mixed in the wake of yesterday's sharp drop in late-day action, with peripheral markets reversing lower but main equity markets moving higher, as the attention on the spreading coronavirus turns to Europe. Crude oil prices and bond yields are rebounding from decisive tumbles as monetary and fiscal support expectations rise, aimed at combating the impact of the spreading coronavirus outbreak. Also, reports that Russia may be open to resuming talks with Saudi Arabia amid the oil price war flare-up that crushed oil prices and the energy sector seem to be adding some support. The euro and British pound are lower versus the U.S. dollar, which is rebounding solidly after yesterday's drop. In economic news, Eurozone Q4 GDP growth was revised to a higher pace than initially reported, coming in at a 1.0% y/y rate of expansion, though French industrial production rebounded at a smaller pace than expected for January. Amid this volatile backdrop, the Schwab Center for Financial Research (SCFR) updated our outlook as discussed in our latest, Schwab Sector Views: Coronavirus Changes Our Views. We note that the coronavirus outbreak has affected global supply chains, consumer demand and interest rates. In response, we're downgrading Financials and upgrading Utilities. Also, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest commentary, Q&A on COVID-19: The Economy, Markets and What Investors Should Do, noting that rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the duration rather than the decline. He adds that markets may have further to fall, but they may not stay down for the rest of the year barring a severe pandemic.

 

The U.K. FTSE 100 Index and Germany's DAX Index are up 1.1%, France's CAC-40 Index is gaining 0.9%, and Switzerland's Swiss Market Index is trading 1.7% higher, while Spain's IBEX 35 Index is declining 0.5% and Italy's FTSE MIB Index is decreasing 0.7%.

  

Asia rebounds as monetary and fiscal support anticipated

 

Stocks in Asia mostly rebounded from yesterday's sharp drop as a price war in the oil market joined festering concerns regarding the impact of the spreading coronavirus. The markets appeared to find support from rebounds in global bond yields and crude oil prices as expectations increase that central banks may deliver stimulus measures and the U.S. could deploy fiscal support, along with Russia suggesting that it may be open to talks with Saudi Arabia regarding the crisis in the oil markets. Japan's Nikkei 225 Index rose 0.9%, China' Shanghai Composite Index increased 1.8%, and the Hong Kong Hang Seng Index gained 1.4%. Australia's S&P/ASX 200 Index rallied 3.1% and South Korea's Kospi Index traded 0.4% higher. Markets in India were closed for a holiday. For guidance on investing in a volatile market environment, check out the Schwab Center for Financial Research's article, When You Have to Sell in a Down Market: How to Make the Best of a Bad Situation. 

     

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