Whoa! What are these strange red figures on my quote screen today? Yes, it is possible for the market to decline on any given day. But is it a "real move"?
I use the following triage to determine whether a change in sentiment has occurred or if it is just normal market volatility. I believe today's move represents the former.
1. What is the Fed doing? It saddens me, but this has to be the first question in the Covid-19 world. Wednesday's FOMC statement was led with this declaration of mission: The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. OK, so FOMC Chair Jerome Powell is committed to giving the bulls what they want, which is an unlimited spigot of free money. He also noted that he is unconcerned with asset price inflation, which is basically a nudge and a wink to those very same stock bulls. So today's market decline is not about the Fed.
2. What is the bond market doing? One cannot attempt to explain the red figures on the first page of CNBC.com without clicking over to the fourth tab. The yield on the 10-Year U.S. Treasury note has fallen dramatically in Thursday's trading, and sits at 0.676% as of this writing. The decline in yields actually began yesterday while Powell was speaking, and clearly the market has once again opted for safety over risk. A quick check of Bloomberg's U.S rates and bonds page shows that the so-called "belly" of the yield curve -- the area from two years to 10 years -- has shown the greatness weakness in yields (strength in price) over the past month. That's an indication that the bond market remains concerned about the intermediate term outlook for the economy, even if the stock market seemed to be dismissing these concerns in its June rally.
3. How are the crude oil markets reacting? To describe today's action in the oil pits, I would choose one word: badly. While the price of the front-month (July) contract has fallen by nearly $3 per barrel, or 8% in today's trading, the out months have performed poorly as well. With the July 2021 contract quoted at $38.68 versus the July 2020 contract's recent price of $36.62, the oil futures curve is telling us to be wary of predictions of a v-shaped recovery for the global economy. Until recently that curve was showing heavy contango (future months' contracts priced at higher levels than current months' contracts) and while we are still technically in contango, the relative flattening of the curve shows that worries about the level of demand are ruling the oil markets.
So, that gives you a one, two, three analysis of the markets. Sectors that have rocketed higher based on hopes for a quick recovery -- airlines, cruise lines, commercial real estate landlords -- are performing terribly today. This market can and will change its mind very quickly. Make sure your portfolio is constructed to reflect that reality in the brave, new Covid-19 world.