The Wall Street Journal - 14.03.2020 - 15.03.2020

B6| Saturday/Sunday, March 14 - 15, 2020 ** THE WALL STREET JOURNAL.

EXCHANGE

I

n a chaotic week for the
world, it’s been a wild week
for markets.
With the spread of the
new coronavirus rippling
through industries and the
launching of an oil price war, ma-
jor indexes fell from record highs
just three weeks ago in one of the
worst weeks in the stock market’s
history. On Friday, the market re-
covered, gaining nearly 2,000
points as President Trump an-
nounced a national emergency.
In uncertain times, it’s no sur-
prise that money is moving. Here
are sectors and pockets of the mar-
ket to watch in the weeks ahead.

((Transportation
What to Watch For: Hidden
Strengths
Airline and cruise stocks are hav-
ing their worst year on record. The
Dow Jones 20 Transportation Aver-
age is down 33% so far this year,
outpacing the benchmark Dow Jones
Industrials Average’s drop by 6 per-
centage points. The big declines sug-
gest investors believe the pan-
demic’s fallout will linger in travel
and transport companies for some
time, several analysts said, and the
U.S. economy could remain weak.
Investors watch transport stocks
because weakness in shares of com-
panies that transport raw goods
and materials can point to broader
turmoil for the market. Some have
fared better, including third-party
logistics providers. Landstar Sys-
tem Inc. and Expeditors Interna-
tional of Washington, which help
companies coordinate their ship-
ping orders, have outperformed
other transportation stocks during
this rout, losing just 20% and 21%,
respectively, for the year through
Thursday. —Sebastian Pellejero

((Warren Buffett
What to Watch For:WhatHe
Might Buy
Berkshire Hathaway Inc.’s War-
ren Buffett likes to say his investing
strategy is “to be fearful when oth-
ers are greedy and to be greedy
only when others are fearful.” The
question is what he might buy now
when the market is fearful.
As stock prices climbed in re-
cent years, Mr. Buffett did few
deals and piled up Berkshire’s
cash, which stood at $128 billion
at the end of 2019. During the last
financial crisis, Berkshire swooped
in to rescue cash-strapped compa-
nies including General Electric Co.
and Goldman Sachs Group Inc.
“Every decade or so, dark
clouds will fill the economic skies,
and they will briefly rain gold,”
Mr. Buffett wrote in his 2016 an-
nual letter. “When downpours of
that sort occur, it’s imperative that
we rush outdoors carrying wash-
tubs, not teaspoons. And that we
will do.” —Nicole Friedman

((Banks
What to Watch For:
Local Economies
U.S. bank stocks have taken a
worse beating in recent weeks
than the broader market, thanks to
their tendency to mirror expecta-
tions for the economy. The KBW
Nasdaq Bank Index fell 32% over
the last month, compared with a
20% drop in the S&P 500. Part of

that slide has come from major re-

gional banks, financial institutions

with assets between $50 billion

and $500 billion.

The segment’s high concentration

of commercial and industrial loans

means its fate is tied to the strength

of local economies across the coun-

try. And falling interest rates have

cut into these banks’ net interest in-

come. Investors should keep an eye

on each bank’s loan loss provisions,

or the pool of money set aside to

cover defaults and nonpayments. If

that pool gets bigger during the first

quarter, it could mean regional

banks could experience deteriora-

tion of their strong credit profile.

—Orla McCaffrey

((Health Care

What to Watch For:

Virus Developments

Health-care stocks have been

among the relative safe-havens in

the recent equities rout, falling the

least of the S&P 500’s 11 sectors so

far this month. Perhaps unsurpris-

ingly, some companies working on

potential treatments for the corona-

virus have fared particularly well.

Gilead Sciences Inc. shares are up

2.0% this month, and Regeneron

Pharmaceuticals Inc. shares have

gained 4.7%. Regeneron has been

working to develop antibody treat-

ments for the coronavirus, and a

drug from Gilead has begun clinical

tests in the U.S. —Karen Langley

((Restaurants

What To Watch For:

Social Distancing

A volatile market and growing

quarantine conditions will test

U.S. restaurant business models.

Restaurants were already strug-

gling to attract and retain work-

ers and coronavirus illnesses will

likely strain operations further.

New York Gov. Andrew Cuomo an-

nounced that starting this past

Friday 13 all events of 500 people

or more must be canceled and

that businesses with fewer than

500 people in attendance must

cut their capacity in half, includ-

ing restaurants. Even in the

booming economy of 2019, restau-

rants still struggled to grow their

customer base. Last year, overall

customer traffic to restaurants

declined by 3.1%, according to an-

alytics firm Black Box Intelli-

gence. So far, public restaurant

company stocks are mirroring the

greater stock market. A closely

followed industry index that

tracks the major publicly traded

chains declined about 22% year to

date as of March 12, according to

FactSet. The S&P Index overall

was down about 23%.

—Jenna Telesca

((Life Insurance

What To Watch For: Sales

Declines

The recent plunge in Treasury

yields complicates life for the life

insurance industry. If rates stay at

the new low level indefinitely, in-

surers face the possibility of rais-

ing prices and fees on various

products and cutting back on

promised benefits. Already sales of

fixed annuities, an interest-paying

product long popular with conser-

vative savers, are down because of

yield declines last year that made

the products less appealing. Sales

slid 19% to $30.8 billion in last

year’s fourth quarter from a peak

of $38.1 billion in the second quar-

ter, according to research firm

Limra. Insurers “will need to con-

tinue to adjust business models

and/or reprice products,” said Mi-

chael Fruchter, a senior credit offi-

cer at Moody’s Investors Service.

—Leslie Scism

((Technology

What to Watch For: Work From

Home Winners

Just a few weeks ago, big tech

companies were continuing to pull

major stock indexes higher. Now,

they have suffered along with the

rest of the market, though some

names are holding up better than

others. Shares of Facebook Inc. are

down 12% so far this month and

shares of Alphabet Inc. have

dropped 9.3%, both steeper than

the 8.2% fall of the S&P 500. Apple

Inc.,bycontrastisup1.7%in

March, and Amazon Inc. has

dropped 5.2%. Microsoft’s 1.7% de-

cline also makes it a relative out-

performer. One company whose

technology could facilitate remote

work has stood out: Zoom Video

Communications Inc., was up 2.4%

month-to-date. —Karen Langley

((Gold

What to Watch For:

Virus Vulnerability

Gold has been an effective port-

folio hedge recently, but even the

safe-haven metal has been bat-

tered by the new coronavirus. Bul-

lion is down just slightly in 2020,

outpacing riskier investments like

stocks that have tumbled but still

trailing returns from long-term

Treasurys. Even gold and shares of

gold miners have been hit by a

wave of selling at times in recent

days, with investors liquidating

positions to raise cash in order to

cover losses suffered in the stock

market. That trend includes mar-

gin calls for those who had used

stocks as collateral to buy other

securities. With the value of those

positions shrinking substantially,

banks can demand repayment,

triggering forced sales of unre-

lated assets. —Amrith Ramkumar

((Cash

What to Watch For:The Fed

For investors who count on

cash, the Federal Reserve’s ac-

tions are becoming more of a

headache. The recent rate cut has

pressured yields on bank deposits,

money market accounts, and

Treasurys. According to the FDIC,

the average rate for a 12-month

CD is 0.46% for the week of March

9. That compares with 0.09% for a
   savings account, and 0.15% for a
   money market account for depos-
   its under $100,000. For parking
   cash, government money markets
   are paying much greater interest
   with same-day liquidity than a
   bank account or certificate of de-
   posit. Investors may want to have
   extra cash around to buy other in-
   vestments when the market is
   down, however.
   —Veronica Dagher

((Muni Bonds

What to Watch For:Pockets of

New Risk

The roughly $4 trillion munici-

pal market has long been seen as

a safe place to shield your money.

State and local governments with

the power to raise taxes tend to

make their bond payments on

time. But some of the private

firms now in the muni market are

vulnerable to the economic im-

pact of the new coronavirus.

Prices dropped this week on muni

bonds backed by airline payments

and hospital revenues, with some

falling much as 14%, according to

trade data from the Municipal Se-

curities Rulemaking Board. Those

aren’t the only muni borrowers

now looking riskier. Nursing

homes, amusement parks and cul-

tural attractions are frequent is-

suers of junk-rated muni bonds,

and investors are pulling money

from the high-yield muni funds

that package and sell their debt.

In the week ended Wednesday

those investors pulled $1.7 billion,

according to Refinitiv.

—Heather Gillers

BYSTAFF OFTHEWALLSTREETJOURNAL

What to Watch:

An Investor’s Guide

From gold to tech to Warren Buffett’s next buys, here are pockets

of the market to follow closely in the weeks ahead

bad. Who will get bailed out? In

2009 it was the banks and the car

makers, but only after shares were

crushed. Partisanship is even more

extreme today, and likely to inter-

fere with government rescues. Talk

from the White House earlier this

week about support for the stricken

shale-oil drillers has already

prompted outrage from Democrats

focused on helping low-wage work-

ers. Investors should be humble

about their ability to predict which

companies the government will save.

The second judgment is on the

financial system: Will it come un-

glued, and create problems in the

real economy?

Cracks appeared in the financial

system in the middle of the week

as the market falls began to feed

on themselves. Treasury prices

went haywire, with very similar

bonds moving quite differently on

Thursday. A scramble for dollars

pushed up the cost of hedging as

banks chose not to supply the dol-

lars demanded. The biggest ex-

change-traded funds owning U.S.

corporate bonds and long-dated

Treasurys also fell to huge dis-

counts to the value of the bonds

they own, as the price of the funds

plunged far more than the hard-to-

trade underlying bond market.

The problems showed that banks

and hedge funds who usually try to

profit from such dislocations were

unwilling or unable to trade, sug-

gesting deeper problems.

But central banks are ready to

help, and aware that they made a

mistake by allowing Lehman to fail

in 2008. The Federal Reserve made

$1.5 trillion of short-term financ-

ing available, and central banks

elsewhere have been supportive.

The banks are also in much better

shape than they were, making a fi-

nancial crisis less likely—although

vulnerabilities remain, especially in

the highly leveraged corporate sec-

tor and among indebted emerging-

market companies.

fer some guidance. The 27% fall in

the S&P 500 from its peak, before

Friday’s stunning rebound, is much

smaller than in four of the last

seven recessions. It is about the

same as the 1982 recession, and

already bigger than the limited

drops in 1980 and 1990. When

stocks are expensive, as they were

a month ago, they could be ex-

pected to drop more, as the dot-

com crash showed.

On the plus side, governments

can more easily spend money to

deal with what a temporary virus

shock than they can for an ordi-

nary business-cycle recession, so

perhaps the economic damage will

be contained.

Finally, when assessing stocks

we should also turn the question

around: What about the alterna-

tives? Bond yields have collapsed

this year as bond prices soared.

Those who bought safe-haven

Treasurys amid Monday’s stock-

market rout have lost money. The

gold price has dropped for four

days in a row and is almost back

down to where it started the year.

Selling haven assets and risky

assets at the same time, as we saw

this week, is a classic sign of in-

vestor capitulation. It shows a

rush into the ultimate safety of

cash as fear overwhelms any pros-

pect of return. Anything that can

be sold, is sold.

Unfortunately that doesn’t guar-

antee prices can’t fall even further,

as dead-cat bounces in stocks have

shown in the past weeks, repeating

the rip-your-face-off rallies that in-

terspersed the drops of 2008-09.

Still, stocks have now fallen a

verylongway,veryquickly.Itisa

great time to be looking for bar-

gains—but only for those willing

and able to hold on through what

could be some very troubled times.

nent loss needs three big judgments.
The first is political. Will gov-
ernments provide sufficient sup-
port to keep the economy going
through what could be months of
lockdowns, travel bans and self-
isolation? Central-bank action isn’t
enough: investors want to see seri-
ous government spending, not just
cheap money.
Governments are acting. Austra-
lia is making no-strings handouts
to pensioners and small busi-
nesses. Hong Kong promised a pay-
out to every citizen this summer.
The U.K. is planning a spending
spree, France says it will shield
workers and companies, and even
Germany says it will put its short
arms into its deep pockets.
President Trump declared a
state of emergency on Friday, and
announced the purchase of oil for
the strategic reserve, helping
stocks and oil rebound. But actual
money has mostly yet to arrive,
while U.S. politicians are fighting
both about how much to spend on
stimulus and how to spend it.
As Dennis DeBusschere, head of
portfolio strategy at Evercore ISI,
put it: “Investors are less likely to
panic if the federal government is
panicking.” The message from the
White House has been that every-
thing’s just fine, which isn’t what
the market wants to hear.
Politics affects individual compa-
nies when the economy gets really

Continued from page B1

Taking Stock

Of the Market

Moment

Traders on the floor of the New York Stock Exchange Thursday.

Put together the political and fi-

nancial judgments and you can de-

cide where you stand in the LUV de-

bate: Will the shape of the recovery

be like an L, U or V? Government

support and a limited spread of the

virus leading to a V-shaped rebound

would make plenty of assets look

cheap right now.

I expect longer-lasting economic

effects as layoffs and lost opportu-

nities leave a post-viral gloom on

the economy, making a U with an

extended low more likely, even as

governments are eventually forced

to respond in size.

The third judgment: Can compa-

nies survive even without help?

Will an individual company or in-

dustry, say, like airlines, survive

months of customer caution, closed

borders, absent staff and govern-

ment restrictions on doing business?

What is important is having

enough cash to avoid going bust

before the economy rebounds, and

to cover a period in case a reces-

sion is deep enough to feed on it-

self. Chuck out earnings forecasts,

and look at debt costs, wages, and

access to credit lines. Strong bal-

ance sheets mean survival, which

is vital to avoid permanent loss.

Then there is the question of

timing. There is no real precedent

for the economic or financial im-

pacts of Covid-19, because govern-

ments haven’t responded so se-

verely to any past pandemic. But

comparisons to past recessions of-

Stocks have fallen a very

long way, very quickly. It

could be a great time to

find some bargains.

KIERSTEN ESSENPREIS

MICHAEL NAGLE/BLOOMBERG NEWS