Wednesday, February 26, 2020

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Why the stock market’s silver lining playbook flopped on Tuesday

Stocks got drubbed on Tuesday.

After the market endured its worst day in two years to start the week, a Turnaround Tuesday failed to materialize for the market.

When the dust settled, the Dow was off 879 points, or 3.1%, the S&P 500 dropped 97 points, or 3%, while the Nasdaq fell 255 points, or 2.8%. Tuesday marked the first back-to-back 3% declines for the S&P 500 since August 2015.

Meanwhile, the 10-year Treasury hit a record low on Tuesday, cementing the view held by many in the market that bonds had been signaling trouble ahead for some time.

Trouble that appears to have now arrived.

The Centers for Disease Control on Tuesday said the coronavirus is “a serious public health threat” in the U.S. The agency added in a briefing that the coronavirus will likely begin spreading in the U.S., saying “It’s not so much of a question of if this will happen anymore but rather more of a question of exactly when this will happen.”

In a note published Tuesday, Greg Daco at Oxford Economics said the firm now expects coronavirus will take 0.25% off 2020 GDP. But this assumes a global pandemic doesn’t break out. An assumption that financial markets now view more skeptically.

“If the coronavirus outbreak becomes a global pandemic, the consequences would be much more severe,” Daco writes. “Along with the human costs that would entail, the US economy would fall into a recession, with GDP tumbling 1.7% relative to a no-virus scenario.”

As for the market outlook, Tuesday’s decline now puts investors into territory we haven’t explored since 2015.

On Monday, analysts at Bespoke Investment Group noted that when the market begins a week with a decline of more than 2%, the market tends to bounce back quickly. A bit of optimism — a silver lining —for investors left stunned after Monday’s decline.

According to Bespoke, excluding this week’s action there have been 18 Mondays since 2009 during which the S&P 500 dropped 2% or more. The market traded higher the next day 15 times with these gains on these days averaging 1%.

Over the next week, the market was higher 94% of the time following a Monday decline of 2% or more. Only three times since the crisis had the market declined the next day after a Monday sell-off greater than 2% before Tuesday.

But now this has happened four times. And while stocks were eventually higher over the next month in two of these three prior instances in which stocks dropped 2% on Monday and kept falling on Tuesday, the timing isn’t inspiring — June 2009, October 2011, and August 2015 aren’t periods investors would care to remember.