U.S. stocks continued selling off incredibly hard on Monday, with treasury yields hitting remarkably low levels, as the flight for safety was pronounced.
The flight to safety was more pronounced compared to February's selloff, as a result of even more bad news on the Coronavirus.
To see why the market is moving the way it is and what to do next, watch the video above.
TheStreet's Jacob sonenshine broke the market down Monday:
U.S. stocks took another beating Monday. Here's why and here's what to expect going forward. Now, let's look at the U.S. market real quick before we get to everything else.
All three U.S. uh, indexes, major U.S. indexes down considerably. S&P 500 down 6%. Dow Jones down more than 6%, S&P down more than 6%. Nasdaq down more than 5%. Ten year treasury yield down to .55%. It was as low as .4% at one point, and that is because investors continue at a remarkable rate to move into safety, the ten year, the thirty year treasury is down to 1%. That is just around and a little bit under, actually, where the federal funds rate is, which is just above 1%. So this means investors are paying just as much for a thirty year asset as they are for an asset for a few weeks, and that is telling you that investors, probably many investors, are really, really worried about a recession. Don't know about expecting a recession but worrying about a recession from the Coronavirus.
Now, that is what is driving the risk off sentiment. More Coronavirus uh, cases cropping up this weekend, especially in the U.S. Only a few hundred uh, in the U.S. but the rate of increase was really high and that tells you that the spread of the virus into the U.S. is definitely happening. So why was there such a huge drop on Monday? We've had some 3% losses uh, during this entire correction, but why are we talking about more than a 6% loss uh, in the U.S.? And that is just because, not only is there quite a proli- proliferation of the- of cases- of virus cases in the U.S. uh, but it also means that if there is one teacher in a school that gets the virus, the entire school shuts down and that is- that's something that is just gonna keep consumers home uh, and people not spending, and employees at businesses, in schools, and anything home. So it's just a big uh, hit to revenue uh, for companies as people don't spend any money.
Now, recently, the federal reserve lowered rates, and this is a refresher. It's Monday, let's uh, clear out some of the weekend uh, cobwebs. The fed have lowered interest rates. Now, it's important to note that, that can't get consumers out of their house and spending money. It can't get manufacturing plants uh, that have shut down to reopen, if the fear is- is- is about getting sick. The reason that the fed cut rates is because one, credit spreads are widening so the cost of borrowing was- was rising as people were selling off high-yield bonds, uh and so they wanna improve financial conditions uh, and two, if you're expecting a second-half recovery, which is in question a little bit, uh then the lowered interest rates is really going to act as a cushion.
Now, bulls say that stocks versus interest rates look really attractive. Uh, the risk premium on stocks is about 5.5% historical is 3%. That means stocks have fallen 'cause you're demanding a premium for a higher risk. Second half recovery is gonna happen according to the bulls. That's gonna create 2021 over 2020 comps that are gonna be really good and when you have 75% of S&P 500 components trading below their 200 day moving average, from a technical perspective, that indicates a bounce in stocks is coming soon. The bears say, the fed can't cut rates much lower from here. The rate cuts that have happened can't help that much when economic activity resumes. Uh, and also there's a very good chance of a recession, uh if- if people continue to stay shut down in terms of uh schools, and people staying home. Uh, so that risk premium on stocks could be justified. So, those are some really important things to look at. One of the biggest things is, are we gonna have a recession, and the chance of recession is just growing by the week here, as clarity on the virus remains really bad.
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