How To Invest In A Volatile Market Amid A Stable U.S. Economy

On Mar 9, Wall Street put up its worst performance since the last recession in 2008. The coronavirus outbreak and an unexpected crude oil price war between the OPEC and Russia-led consortium resulted in the collapse of the global stock markets.

Meanwhile, despite the virus-driven global disturbance, which forced several corporate behemoths to reduce their financial outlook, the U.S. economy remains stable as indicated by recently released various data for the month of February.

Severe Turmoil on Wall Street

In addition to the coronavirus-led mayhem, crude oil price war between the OPEC and Russia-led group heightened as these cartels failed to reach an agreement on production cut to restore oil price. Moreover, Saudi Arabia slashed its crude oil prices for April delivery. Consequently, both Brent and WTI crude touched their lowest level since the Gulf War of 1991. Precipitous decline in oil prices will significantly hurt U.S. oil companies.

On Mar 9, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — plunged 7.8%, 7.6% and 7.3%, respectively. In fact, the Dow plummeted 2,013.7 points, recording its worst-ever single-day performance pointwise and biggest single-day drop percentagewise since Oct 15, 2008. The indexes are currently very close to entering bear market territory (defined as a drop of 20% or more from its latest high level).

U.S. Economy Remains Stable Despite Stock Market Rout

The U.S. economy, which is currently approaching a historic 11 years of expansion, is yet to show any significant indication of contraction. In fact, a series of data for the last month is shows a different picture.

The U.S. labor market stayed rock-solid with 273,000 job additions in February, well above the consensus estimate of 175,000. Unemployment rate declined to 3.5%, its 50-year low. Wage rate grew 3% year over year while the average work week, considered a key measure of productivity, increased to 34.4 hours. Moreover, the conference report stated that U.S. consumer confidence inched up to 130.7 in February from 130.4 in January.

Meanwhile, ISM services index jumped to 57.3% in February, the highest level in one year. The ISM manufacturing index declined slightly in February to 50.1% from 50.9% in January. However, the sagging manufacturing sector witnessed two consecutive months of expansion after contracting in the last four months of 2019.

Stimulus Measures

The U.S. government has released $8.3 billion emergency funds to fight the spread of the coronavirus domestically. The Trump administration is thinking of a possible payroll tax-cut in order inject more money into wage earners’ pockets. Governments of G-7 nations are likely to take concerted measures to withstand coronavirus impact.

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The Fed reduced federal fund rate by 50 basis points on Mar 3 on an emergency basis. Despite this, per the CME Fed Watch, the market has assigned 100% probability of another cut of 75 basis points in FOMC meeting scheduled for Mar 17-18. Several other central banks are likely to inject more stimuli to ensure sufficient liquidity in the respective economies.

Three Possible Investment Strategies

On Mar 9, the COBE VIX — recognized as the best volatility index of Wall Street — jumped nearly 30% to 54.46, breaking the technically and psychologically vital barrier of 50. This clearly indicates that the market will remain choppy in the near term. However, a few investment strategies are likely to be prudent at this juncture.

Invest in large-cap (market capital > $25 billion) stocks with a Zacks Rank #1 (Strong Buy) that are trading at a good discount. You can see Zacks Investment Research