Fifth Week of Market Mayhem Starts With Limit-Down U.S. Futures

Grim outlook for the global economy sent U.S. equity futures to exchange-mandated halts for the ninth time in 10 days

Fifth Week of Market Mayhem Starts With Limit-Down U.S. Futures
Monitors displaying stock market information are seen through the window of the Nasdaq MarketSite in the Times Square neighborhood of New York, U.S. (Photographer: Michael Nagle/Bloomberg)

(Bloomberg) -- Grim speculation about the fate of the global economy sent U.S. equity futures to exchange-mandated halts for the ninth time in 10 days. Benchmarks for American equities are now down more than 32% in a month.

Warnings about damage to the economy from the coronavirus grew more dire as cities from New York to Los Angeles all but shut down and cases rose rapidly. Federal Reserve Bank of St. Louis President James Bullard said U.S. unemployment may hit 30% in the second quarter, with GDP falling by 50%. That exceeds the warning from Goldman Sachs Group Inc. last week of a 24% contraction. Morgan Stanley said Sunday the contraction could be 30%.

“People are becoming much more realistic about just how bad this recession is going to be,” said Jason Thomas, chief economist at AssetMark. “It doesn’t seem like we’re near a bottom. You look at how much valuations typically fall, sentiment, even just the amount of the drawdown -- we don’t have the kind of visibility you normally have at a bottom.”

Contracts on the S&P 500 expiring in June were down 3.6% at 2,205 as of 8:40 a.m. in London, after sinking to the limit-down level of 2,174 about four minutes after opening. Fed Minneapolis President Neel Kashkari said central bank has more ammunition to support the financial system, even as Congress looked less likely to immediately pass a spending bill.

In Europe, the Stoxx 600 Index dropped 4.6%, snapping a two-day gain, as deaths from the coronavirus outbreak continued growing over the weekend.

The rout signals more pain for U.S. stocks that now trade at the lowest in three years. Equities sank 15% last week as states moved to restrict movement to slow the virus’s spread, grinding to halt some areas of the economy.

Should futures stay pinned at the volatility band overnight, it raises the prospect the whole U.S. market will be shut off for 15 minutes after the open. Those restrictions kick in if the S&P 500 falls 7% after the 9:30 a.m. open in New York.

Volatility has gripped equity markets since the virus began crippling the global economy, with U.S. stocks registering swings last seen during the financial crisis. Investors have pinned hopes for a rapid recovery from what looks to be a certain recession on Congress’s ability to get a flood of cash into the system to help Americans and companies meet financial obligations.

Fifth Week of Market Mayhem Starts With Limit-Down U.S. Futures

Longer-term projection of where markets are headed are circulating on Wall Street. Leuthold Group, the Minneapolis investment house, compared the time line of past market sell-offs with past slumps in the economy. In 93 years of data, it found that the quickest it’s ever been from the start of a recession to the bottom of a bear market was two months, in 1957. On the other hand, over 11 recessions, stocks didn’t start to recover until 1 1/2 years after the economy started contracting, on average.

Dubravko Lakos-Bujas, a strategist at JPMorgan Chase & Co., wrote that if policy makers fail to pass a comprehensive fiscal package promptly, selling will accelerate, spreading to marquee momentum stocks that have so far fallen less than other groups. Marking down those companies to December 2018 lows -- when they saw their last big beating -- implies the index drops to 1,940, 43% from the February record based on Friday’s close.

The S&P 500 just took the fastest ever plunge from a record into a bear market and is now 30% below the Feb. 19 high. Bulls have been tempted to declare that valuations already account for the likely Govt economic pain and what it will do to corporate earnings. Even if that’s the case, says Doug Ramsey, chief investment officer at Leuthold, it doesn’t mean the sell-off is over.

“It’s popular to say that the market ‘sells the rumor, and buys the fact,’ but we think there will be a phase in which the stock market and economic numbers decline together,” Ramsey wrote in a note to clients. “We believe it is too early to expect the market to form a major bear market low.”

The S&P 500 sank 4.3% Friday, plunging through the Christmas Eve 2018 level that twice halted sell-offs earlier in the week. After its worst week since the financial crisis, it’s now down 32% from its Feb. 19 record.

Moves have been so violent, futures reached levels that prevent them from going move than 5% from a reference price calculated at the end of the prior day’s session. Four times in the past two weeks, the S&P 500 hit the 7% volatility switch.

Some of the first economic reports that cover the period when the U.S. stepped up measures to contain the virus by canceling major events and limiting travel are due this week, with investors watching early March readings on both manufacturing and services that are expected to show contraction. Jobless claims due Thursday are forecast to have more than quadrupled from the previous week to a record above 1 million.

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