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A Bird's Eye View Blog

Fireside Charts: Volatility Surges (Again), the Oil Price War, and Recession Indicators Are on the Rise

By:BCM Investment Team | Date:Mar11, 2020 | Category: Equity, Economics, Market Highlights, Fireside Charts

While we've seen some recovery since Monday's massive day-long rout, it's been anything but smooth sailing in the markets this week. Volatility has surged—with the S&P 500 index moving a cumulative ~15% in one day—as investors struggle to make up their minds about the state of the economy. In addition to coronavirus fears, much of this week's instability has been driven by the emerging oil price war between Saudi Arabia and Russia. Saudi Arabia slashed oil prices by nearly 10% over the weekend and is moving to flood the market, but is such aggressive pricing sustainable? We've already seen multiple leveraged crude ETFs being shuttered and the high-yield market hit a slump in the wake of the crash, so we're hoping the conflict is short-lived. Meanwhile, recession probability indicators have passed 50% in the U.S., and Europe looks to be following suit. And while COVID-19 is keeping doctors busy, "Dr. Copper" carved out some time to give his two cents on the matter with the formation of a death cross—a historically reliable recession indicator. Could the trend reverse if containment efforts prove effective?

 

1. Volatility is at new heights... yesterday the S&P 500 was up ~5%, then turned negative, and then closed up~4.9%. ~15% cumulative movement intraday?!

 

s&p 500 daily % changes

Source: WSJ Daily Shot, from 3/11/20

 

 

2. This is still the mindset of the American Investor:

 

stocks retirement

Source: WSJ Daily Shot, from 3/10/20

 

 

3. We shall see how long Suadi Arabia can play this game of chicken...

 

break even point crude prices

Source: WSJ Daily Shot, from 3/10/20

 

 

4. This is why we do not use ETFs that actively employ options, leverage, inverse or 2x/3x. We also don't use ETNs as they are an asset of the issuing bank...

 

crude etfs shut down

Source: WSJ Daily Shot, from 3/11/20

 

 

5. The Saudi's price and production war has caused a spike in the yield of the energy sector's junk bonds. Energy sector junk bonds make up about 15% of the total junk bond market.

 

energy and E&P high yield

Source: WSJ Daily Shot, from 3/11/20

 

 

6. Regardless of your politics, COVID-19 may be the straw that breaks the economy's back...

 

recession probability

Source: WSJ Daily Shot, from 3/11/20

 

 

7. The same may go for Europe...

 

europe recession probability

Source: WSJ Daily Shot, from 3/11/20

 

 

8. "Dr. Copper" seems to be confirming the recession worries. Let's see if there is follow through as this can reverse just a quickly...

 

copper death cross

Source: WSJ Daily Shot, from 3/11/20

 

 

9. Some interesting data on COVID-19's spread.

 

covid-19 spread

Source: WSJ Daily Shot, from 3/11/20

 

 

10. Info from the New England Journal of Medicine:

 

incubation period coronavirus

Source: WSJ Daily Shot, from 3/11/20

 

 

11. Effectively fighting COVID-19 can be done, but new flare-ups will likely emerge from other contaminated regions.

 

south korea coronavirus

Source: WSJ Daily Shot, from 3/11/20

 

 

 

Are these dramatic market swings (~15% total intraday!) making your clients anxious for their investments? BCM believes there is a better way to manage volatility in pursuit of successful long-term investing. Read “Our Take on Volatility” by Assistant Portfolio Manager Denis Rezendes, CFA to learn more.

 

Our Take on Volatility

 

 

 

 

 


Disclosure: The charts and info-graphics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are a recommendation to take any action. Individual securities mentioned may be held in client accounts.