By Tom Burnett, CFA
On March 9, 2020, the global stock markets sold off sharply. Several factors accounted for the sell off, but the two primary culprits were the Corona Virus scare (which will limit travel related business and create supply chain disruptions) and the OPEC-Russia crude oil pricing conflict. Crude oil prices had the sharpest one-day fall since the Gulf War events in 1991. The stock market decline was the largest single day point loss in the history of the Dow Jones Industrial Average. Prices are looking to recover on the morning of March 10, but we will look closely, and the damage inflicted yesterday.
The year-to-date performance tables summarize the carnage that has taken place in the stock prices of companies in the financial, energy and transportation sectors. For the 2020 year, the DJIA closed 16.4% and the S/P 500 Index down 15.0%. Within those wide parameters, several important segments have performed even worse. The DJ Transportation Average is down 25.8%, the S/P 500 Financial Index is down 26.4%, and the S/P 500 Energy Index is down 44.2%. (Return data all from WSJ.com).
The banks are suffering from record low interest rates which pushed the rate on the 30-year Treasury Bond below one percent. Simply put, the banks’ loan books are not profitable with rates at the current historical levels. For energy stocks, the OPEC-Russia conflict could lead to a ‘price war’ where production goes all out and prices are pushed to levels where profitability becomes impossible. Finally, the impact of the Corona Virus on global trade and business confidence has been severe, especially on the aviation and travel industries. All these negative factors have persuaded investors that corporate earnings estimates must be taken down while the odds of a global recession have been increased. We intend to follow up with an analysis of the corporate earnings revisions as soon as we have accurate data available.
Tom Burnett, CFA is Director of Research