What’s Going on in the Oil Markets?
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 3/06/2020. Rates and Economic Calendar Data from Bloomberg as of 3/06/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
This may come as a surprise to some, however, global equity markets were able to post weekly gains despite the sharp selloff that occurred in the second half of last week. In the U.S., the S&P 500 Index rose to a level of 2,972, representing a gain of 0.65%, while the Dow Jones Industrial Average increased by 1.79%. Small and mid-cap companies were the exception with their representative indexes posting negative returns for the week. On the international equities front, both developed and emerging markets finished positive, returning 0.35% and 0.69% last week, respectively. Finally, the 10-year U.S. Treasury yield fell to 0.74% as money flowed to perceived safe-haven assets. During the whirlwind week, the CBOE Volatility Index (VIX) reached levels not seen since 2008, peaking around 60. To put this into perspective, throughout 2019 the VIX average level was roughly 16.
Markets experienced quite the inauspicious start to this week. If investors didn’t have enough to handle already, global equity markets plummeted on Monday fueled by a breakdown in discussions over oil production cuts at OPEC (the Organization of Petroleum Exporting Countries), triggering the 7% NYSE circuit breaker shortly after the open. Oil markets have been a major casualty of the coronavirus outbreak. The economic impact of the virus delivered a significant hit to the demand side of the equation, sending prices lower since the start of the new year. Over the weekend, oil markets would take a major blow and send equity markets into a frenzy. The combination of the oil demand shock from the coronavirus, with preexisting tensions between OPEC+ nations, would cause oil prices to plummet more than 30%, representing the biggest single-day drop for the commodity since the Gulf War in 1991.
It began last Friday when a proposal for all OPEC member nations to cut oil output amid waning demand, thus stabilizing the market and prices, fell through. What followed was an all-out price war between Saudi Arabia and Russia (a member of OPEC+), with ricochet shots fired at the U.S.. Saudi Arabia would slash prices and threaten to increase output. Russia responded in-kind with plans to ramp up production, leaving many to suggest that Russia and Saudi Arabia may be using this as an opportunity to hurt U.S. shale producers via low prices. We remain hopeful that some form of compromise or perhaps even an agreement to extend the current production agreement beyond April is forthcoming.
While the full economic impact of the coronavirus is still not clear, many believe that the worst-case scenario has likely already been priced into the market, and several technical indicators are suggesting that equity markets are oversold. According to Brickell Analytics, in late-January, market sentiment was 90% bullish, and now, market sentiment is just 5% bullish. While this time may be different of course, this type of market psychology has generally preceded market bottoms historically, not market crashes.
Although it may not be clear when exactly equity markets will find a bottom, we believe that a full recovery is on the horizon. Nonetheless, the days of elevated market volatility are not behind us, which is why we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.