Market Flipped to Risk-Off Monday

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Stocks had fallen sharply Monday afternoon, as investors fled into safe assets, a pivot from the morning. 

The three major U.S. indices saw accelerating losses midday Monday, with the S&P 500 falling as much as 2%. Contrary to the morning, money was flowing into the 10 year treasury bond, pushing the yield down to 0.73% from 0.75%. 

The market rebounded somewhat after 12 pm E.T., but the risk-of sentiment has clearly begun to set in. 

This all comes as OPEC agreed to cut production by 9.7 million barrels per day, down from a previous hope of 20 million. Investors had also anticipated the cut almost a week ago. Crude oil’s price gain moderated from 2% to 1.1%. Exxon Mobil  (XOM) - Get Report and Chevron  (CVX) - Get Report saw their share prices fall l 1.6% and rise 2.4%, respectively. 

The spread of the coronavirus in New York and the U.S. broadly seems to be decelerating, although investors seem to have done their buying of stocks for the near-term, with the S&P 500 up just under 5% in the past week. The average stock on the index now trades at 17.5 times next year’s earnings, high for the beginning of a recession. 

Money moved into less volatile stocks. The Dow Jones leaders were mainly defensive names like Procter and Gamble  (PG) - Get Report, which rose 0.45% and Walmart  (WMT) - Get Report, which rose 2.32%.

Morgan Stanley did raise its year-end 2020 price target on the S&P 500 to 3,000, representing 8%, as the bank cited a speedy liquidity pump from the Federal Reserve creating a faster-than-expected bounce in stocks. But this will come only after another downdraft, Chief Strategist Mike Wilson thinks. 

Wall Street is grappling with the severity of the 2020 and 2021 earnings impact from virus. Aggregate analyst estimates, according to FactSet data, show a decline in earnings expectations for 2020 of roughly 12% to $158 on the S&P 500. 

Strategists are more bearish. Macro models show that earnings could go as low as $110, according to Goldman Sachs strategist David Kostin. That’s an almost 40% drop in exceptions from January 1 to date. The S&P 500 is only down 14.8% year-to-date. 

Large-cap bank earnings come out this week, with many banks sure to show that credit losses will outweigh higher loan volumes, which arise partly from lower interest rates and partly from the Fed’s multiple lending programs. Importantly, the Fed is guaranteeing loan losses on its most recent small business, household and municipal lending program, which protects banks. 

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