Coronavirus: how to read the market reaction | Charts that Count

Coronavirus: how to read the market reaction | Charts that Count

Welcome to Charts that Count. After a horrendous
final week of February, in which fear of the coronavirus
gripped global markets, the US stock market
has rallied back over the last four
days suggesting, at least tentatively,
that investors may be back in risk-on mode. But let’s decompose the rally. Schematically, the red line
here is the path of the S&P 500, showing the progress
of the broad market. It has risen 5 per cent
over the past four days. Again, pretty furious progress
over a short period of time. However, look at the
components of the index that are leading the rally. This one is managed care stocks. These are the privately-owned
healthcare stocks that Senator Bernie Sanders
had promised to eliminate. The outstanding showing by
Joe Biden in the Super Tuesday primary polls sent those
stocks roaring by 15 per cent. The next broad leader of the
market rally – utilities. These are up 7 per cent . Again, faster than
the wider market. What are utilities to investors? The ultimate safe
haven – high yields, stability, a port in a storm. Now, what is underperforming? Let’s start with banks. Bank stocks have not risen at
all over the past four days, while the rest of the market
has rallied so furiously, as the sector has suffered
a kind of double whammy. The Fed’s 50 basis point
cut to interest rates threatens to compress
their profit margins. And at the same time they
are economically sensitive. So investors worried about
future growth in the economy will sell them off. Finally, the red line
is 10-year bond yields, which have continued to fall
while stocks have risen, and even after a little
rally in the last day, still remain near the all-time
lows of a couple of days ago. What does this mean? Maybe several things,
but none of them good. Certainly, such low
bond yields suggest that investors are worried
that the Federal Reserve, faced with further weakening
of the economy, may have to cut rates yet again. They also suggest no
fear among investors that growth is going
to push inflation up. What then have we
seen over this period? A rally in the stock
market, but one that has been led
by political relief and by investors seeking safety
in their choice of sectors. Economically sensitive
stocks, on the other hand, making very little
progress, and bond yields strongly indicating
that investors do not see growth ahead. What we have in some
is a risk-off rally.

7 thoughts on “Coronavirus: how to read the market reaction | Charts that Count

  1. This video is a repost of an earlier version. In the previous version Rob said that Mr Sanders wants to privatise certain healthcare stocks, of course he meant to say nationalise. We thank
    Pip McI who first pointed out the error and Rob for making the time to give us a second take. Let us know what other topics you would like us to cover in Charts that Count. We welcome your feedback.

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