Coal In Wall Street’s Stocking? Stocks Crumble To 14-Month Lows

(Thursday Market Close) Whether it’s the Fed hinting at more rate hikes or Congress talking about a possible shutdown in Washington, it seems like the market just can’t catch a break this week.

One day after getting rattled by the Fed raising rates and sounding less dovish about 2019 than some investors might have hoped, the market fell another 2% Thursday as a budget agreement appeared to unravel in Washington. Weak guidance from Conagra (NYSE:CAG) might have been another factor driving stocks down to new lows for the year and to their lowest levels in 14 months, while another bleak day in the crude market continued to drive fears of possible declining economic activity around the world.

There weren’t too many other headlines today to account for the big plunge, and shutdowns haven’t really hurt the market much in the past. Still, it was another sign of political uncertainty that some bearish investors could potentially hang their hats on, along with the ongoing China tariff battle and the unresolved Brexit situation.

Looking at it from a sector perspective, only utilities saw any gains Thursday. Consumer discretionary was the worst performer, dropping more than 2%, but consumer staples wasn’t far behind due in part to pressure from a double-digit drop in CAG shares. The food packaging company reported mixed results for the quarter, but it appears to be its guidance that might have really hit shares.

Who Will Buy?

With the S&P 500 (SPX) down about 14% from the all-time high posted last fall as it entered Thursday’s session, there just hasn’t seemed to be much buying interest lately. That appeared to be the case again Thursday, with few people apparently willing to step up and catch what lately has been a falling knife. That could help explain why markets keep plunging every day. Even in normal times, there are always people selling, but in normal times, more people are ready to buy. That’s apparently not happening so much these days.

One school of thought claims that the Fed is partially responsible for this because it continues to see two rate hikes last year and many in the market had come into yesterday hoping for one or none. On the other hand, the Fed also said a lot of good things about the economy, and the market didn’t seem to listen.

Wherever people might stand on that issue, it does seem to be the case, more often than not, that when Fed Chair Jerome Powell speaks, the market goes down. It hasn’t happened every time since he took over the top position early this year, but perhaps often enough that investors might want to consider being extra careful on days when Powell is on the calendar. The fact is, Powell is going to be holding press conferences at every Fed meeting from now on, so that might suggest more volatility ahead, at least based on past experience.

Speaking of volatility, there’s no break from that, either. The VIX “fear gauge” jumped double-digits to above 28 today, the highest it’s been since October.

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First Signs of Panic, But That’s Not Necessarily All Bad

Ever since the market started getting soft in October, it’s been a pretty orderly process on the way down. Selling has mostly been slow and methodical as the S&P 500 Index (SPX) dropped hundreds of points from highs above 2940 less than three months ago to where it is now hovering below 2500.

That changed on Thursday in a big way. We saw panic today, and when things get panicked, it can sometimes indicate chances of a sell-off losing steam. That’s not to say there’s been a bottom, only that the market did come back pretty strongly late in the session in a kind of whip-saw move before getting slammed again in the very last minutes.

People sometimes ask how one defines panic. Well, it’s like Supreme Court Justice Potter Stewart once said about another subject: It’s hard to describe it, but know it when you see it. When the SPX fell quickly on Thursday from being down 30 points to suddenly being down 60, panic seemed evident.

Some might be surprised to hear this, because maybe it feels like the market has been panicking for weeks. That’s understandable. However, the methodical, orderly pattern held up until Thursday.

That raises the question of what’s next? Looking ahead to next week, we have a holiday-shortened trading schedule and probably some thin volume. While there aren’t any guarantees, thin volume can sometimes be a precursor for upward activity. When investors return from the next two holiday weeks to a new calendar year, they’ll get some data almost immediately on December payrolls and wages.

After that, we’ll start to see earnings. The bulls are likely hoping that CEOs could come on the earnings calls and say things aren’t as bad as they look. Of course, it could go the other way. Either way, it’s arguably important to get to earnings, because even though data is nice to have, it’s backward looking. At this point, with stocks getting buried almost every day, some forward-looking perspective from the corporate world might be useful. Companies have been saying lately that they’ve seen strong business in the U.S. but slowing activity overseas, so investors might want to consider staying tuned to see if there’s any change to that and whether CEOs see opportunity once earnings season gets underway in mid-January.

Getting back to Thursday and looking for positives, it might be constructive that the dollar index fell moderately to below 97. Recently, a strong dollar has arguably been one weight on the stock market. The Fed backtracking from a three-hike outlook down to two for next year might have helped provide some of the greenback pressure.

At the same time, 10-year Treasury note yields clawed back to 2.8% after falling under that level for the first time since May. There’s been some talk lately that the 45-basis point fall in yields over the last three months or so might be a boost for the home builder market, and sure enough, those stocks have flattened out a bit lately after getting slammed for weeks. Also, emerging market stocks seem to be seeing signs of a possible rebound, but any chance for that probably depends on some sign of major progress in the China tariff situation.

Figure 1: As Stocks Plunge, So Do Yields: This year-to-date chart of the 10-year Treasury yield (candlestick), shows yields rallying to decade highs in the summer only to plunge back to six-month lows this week. At the same time, the S&P 500 (SPX) has had an even harder time of late. Data Sources: Cboe Global Markets, S&P 500, Dow Indices.

Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options .

Written By: TD Ameritrade