Investors brace for more volatility as wild swings become ‘new normal’


Traders work during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at Wall Street in New York City.

Johannes Eisele | AFP | Getty Images

The S&P 500 has never behaved like this, but Wall Street strategists say get used to it. 

Investors just witnessed the equity benchmark swinging up or down 2% for five days straight in the face of a  coronavirus panic.

In the index’s history dating back to 1927, this is the first time the S&P 500 had a week of alternating gains and losses of more than 2% from Monday through Thursday, according to Bespoke Investment Group. Daily swings like this over a two-week period were only seen at the peak of the financial crisis and in 2011 when U.S. sovereign debt got its first-ever downgrade, the firm said.

“The message to all investors is that they should expect this volatility to continue. This should be considered the new normal going forward,” said Mike Loewengart, managing director of investment strategy at E-Trade.

The Dow Jones Industrial Average jumped north of 1,000 points twice in the past week, only to erase the quadruple-digit gains in the subsequent sessions. The coronavirus outbreak kept investors on edge as global cases of the coronavirus infections surpassed 100,000. It’s also spreading rapidly in the U.S. California has declared a state of emergency, while the number of infections in New York reached 33.

“Uncertainty breeds greater market volatility,” Keith Lerner, SunTrust’s chief market strategist, said in a note. “Much is still unknown about how severe and widespread the coronavirus will become. From a market perspective, what we are seeing is uncomfortable but somewhat typical after shock periods.”

More stimulus?

So far, the actions from global central banks and governments in response to the outbreak haven’t triggered a sustainable rebound. 

The Federal Reserve’s first emergency rate cut since the financial crisis did little to calm investor anxiety. President Donald Trump on Friday  with an $8.3 billion package to aid prevention efforts to produce a vaccine for the deadly disease, but stocks extended their deep rout that day.

“The market is recognizing the global authorities are responding to this,” said Tom Essaye, founder of the Sevens Report. “If the market begins to worry they are not doing that sufficiently, then I think we are going to go down ugly. It is helping stocks hold up.”

Essaye said any further stimulus from China and a decent-sized fiscal package from Germany would be positive to the market, but he doesn’t expect the moves to create a huge rebound.

The fed funds future market is now pricing in the possibility of the U.S. central bank cutting by 75 basis points at its March 18 meeting.

Where is the bottom?

Many on Wall Street expect the market to fall further before recovering as the health crisis unfolds. 

Binky Chadha, Deutsche Bank’s chief equity strategist, sees a bottom on the S&P 500 in the second quarter after stocks falling as much as 20% from its recent peak. 

“The magnitude of the selloff in the S&P 500 so far has further to go; and in terms of duration, just two weeks in, it is much too early to declare this episode as being done,” Chadha said in a note. “We do view the impacts on macro and earnings growth as being relatively short-lived and the market eventually looking through them.”

Deutsche Bank maintained its year-end target of 3250 for the S&P 500, which would represent a 10% gain from here and a flat return for 2020.

Strategists are also urging patience during this heightened volatility, cautioning against panic selling.

“It is during times like these that investors need to maintain a longer-term perspective and stick to their investment process rather than making knee-jerk, binary decisions,” Brian Belski, chief investment strategist at BMO Capital Markets, said in a note.

Week ahead calendar

Monday

Earnings: Stitch Fix

Tuesday

Earnings: Dick’s Sporting Goods

6:00 a.m. NFIB small business optimism

Wednesday

8:30 a.m. Consumer price index

2:00 p.m. Monthly budget statement

Thursday

Earnings: Gap, Slack, Adobe, Broadcom, Ulta Beauty

8:30 a.m. Producer price index

Friday

8:30 a.m. Import price index

10:00 a.m. Consumer sentiment

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