A “Violently Flat" Market

By Nicholas Jasinski |  Tuesday, July 7

Sideways. Stocks dropped into the closing bell today, as the S&P 500 broke a five-day winning streak with a 1.1% loss. The Dow Jones Industrial Average fell 1.5%, the Nasdaq Composite slipped 0.9%, and the Russell 2000 closed down 1.9%.

There wasn't one overarching trigger for the bout of selling, just that stocks had drifted meaningfully higher over the past week and some reversal seemed to be due. It continues much of June's pattern of a daily or weekly back and forth between optimism about a continued economic recovery, versus the threat of rising coronavirus cases prompting new lockdowns, or changes in consumer behavior, and setting that recovery back.

The result has been an essentially flat market on the index level over the past month: Since June 7, the S&P 500 is down just 0.4%. But that obscures plenty of action under the surface. Technology stocks can't stop winning, and the sector is up nearly 6% in the past month, extending its year-to-date gain to 17%. The rising risk to the recovery from growing coronavirus outbreaks has hit economically sensitive sectors hardest: Energy stocks are down 16.5% in the past month, while financials have lost 10.8%.

And the sideways market has seen plenty of jitters over the past month—in both directions. Barron's Ben Levisohn described the current environment as "violently flat" today, citing the Cboe Volatility Index, or VIX, stubbornly sticking close to 30 points, even as the market has recovered most of its February and March losses. In the half decade before the coronavirus crisis, the VIX hardly broke above 25 points at all.

Ben writes:

Yes, that’s well below the 80-plus peak in March, but still in the top-10% of historical readings, according to [Evercore ISI strategist Dennis] DeBusschere. A VIX at its current level implies daily moves of 1.7%.

The high VIX reflects the continued uncertainty surrounding the path of the recovery, both for the economy and the stock market. Whether the VIX continues to fall could depend on whether vaccines and treatments are developed—the U.S. government placed some big bets on Regeneron and Novavax Tuesday—and whether another fiscal package is passed, DeBusschere explains.

It appears to be some time yet before greater clarity emerges. On the coronavirus front today, the confirmed case numbers in several hotspot states have continued to get much worse, hospitalizations have gotten only slightly worse, and deaths have declined slightly. (The past few days of data have been a bit messy, thanks to uneven delays in reporting due to the holiday weekend.)

A consensus is emerging among many on Wall Street that the current outbreak dynamic won’t necessarily lead to widespread economic lockdowns, but that consumers following the news and afraid of falling ill or infecting others are limiting activity on their own. That's bad news for travel, hospitality, dining, and leisure-related industries and companies, but should allow the recovery in many other sectors to continue.

Needless to say, there's plenty of room for that thesis to evolve in either direction over the coming weeks and months.