The Dow Is Tumbling Again. Bear Market Here We Come? - Barron's

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Another day, another 1,000-point drop for the Dow Jones Industrial Average as investors fret about the absence of fiscal stimulus for a coronavirus besieged economy even as the World Health Organization declared a pandemic. And now, some strategists are calling for a bear market.

The market was hanging in there until Sen. Chuck Grassley, said that while a tax cut should be under consideration, it isn’t currently needed, according to a Bloomberg News report.

“I wouldn’t say we ought to do it now, but it’s something you could quickly kick in if needed,” Grassley said. “We’re in the process of analyzing the economic impact of the virus so right now I wouldn’t say it’s necessary.”

Michael Zona, a spokesperson for Sen. Grassley, tweeted that the senator’s comment is “being widely misinterpreted. Sen. Grassley has said all along that a payroll tax cut is an option that should be considered. Everything reasonable is on the table. Right now, congressional leadership is engaged in discussion and working toward building consensus.”

The stock market, however, is unthrilled. The Dow Jones Industrial Average has tumbled 1,241.86, or 5%, to 23,776.30, while the S&P 500 has dropped 4.5% to 2751.31, and the Nasdaq Composite has fallen 4.2% to 7986.70. The yield on the 10-year Treasury has slipped .019 percentage point to 0.74%.

The real action is in the Vix, more formally known as the Cboe Volatility Index. The Vix has risen to 53.37, and is set to spend its fourth consecutive day above 40, the longest such streak since the financial crisis.

We don’t need the Vix to tell us that the market is acting a little bit crazy. The Dow has closed up or down more than 1,000 points six times during the past 12 days, and has traded down between 786 points and 970 three additional times. Each of the three other day’s moves was more than 100 points.

Chalk it up to a market trying to price in what is impossible to know. How much the coronavirus spreads—and how much damage it does to the economy in the process—is still up for debate. Investment banks are busy laying out potential scenarios.

UBS economist Arend Kapteyn and team, for one, cut their global economic growth target to just 2%, reflecting what’s currently priced into the market by their estimates. That’s down from 4% before the coronavirus, and 2.8% before Russia and Saudi Arabia started a price war.

They have little confidence in their number, however. “As long as the flow of new cases is rising, the low is likely not yet in place for a number of risk assets,” they write. If the outbreak becomes a pandemic, the market could drop another 20%, they conclude.

The problem for U.S. stocks is one of earnings, according to Goldman Sachs strategist David Kostin. After recently cutting his earnings forecast for the S&P 500 to $165 a share, he slashed it once again to $157, a drop of 5% from last year. That leads him to one obvious conclusion: “We believe the S&P 500 bull market will soon end,” he writes.

Still, we have a way to go before then. The S&P 500 needs to hit 2708.92 to enter a bear market—just 1.5% away. First though, it has to wrestle with resistance at 2740, Instinet’s Frank Cappelleri writes. And if that doesn’t hold? The S&P 500 could be headed for 2320, the December 2018 low.

For now, though, nothing can be taken for granted, and we should avoid reading too much into any single move. “To put this bluntly, we can trust the market when it’s displaying minimal price movement,” Cappelleri says. “We should be suspicious of it when the swings are wild.”

It could all depend on whether a fiscal stimulus package is passed this week. Don’t get your hopes up. “Political tensions and the calendar are slowing down the path to robust action and it is hard to see Congress actually passing something this week,” writes Evercore ISI’s DC policy expert Sarah Bianchi.

Hang on.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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2020-03-11 18:40:19Z
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