Panic sentiment is growing
Last week not only failed to bring relief to market participants but, on the contrary, significantly heightened anxiety – effectively bringing the market to the edge of an abyss that any rational investor would dread to peer into. The final two trading days were particularly brutal: they completely erased the modest positive momentum that had emerged earlier in the week, ultimately delivering yet another substantial decline for the period.
The oldest U.S. index, the Dow Jones (DJIA-30), suffered the least, falling 0.9% on the week. The main U.S. market benchmark – the S&P 500 – fared considerably worse, losing 2.11%. The technology-heavy NASDAQ Composite declined even further, dropping 3.23%.
What makes the situation particularly troubling is that two of the three leading U.S. indexes (the Dow and NASDAQ) have now shed more than 10% from their all-time highs by the end of March – a threshold investors often interpret as a shift from a correction to a trend reversal.
Throughout the month, the U.S. stock market has been under pressure amid the conflict with Iran and related concerns about elevated oil prices. As a result, the Dow Jones Industrial Average entered correction territory last Friday – just one day after the technology-focused NASDAQ Composite crossed the same threshold.
The S&P 500's losses currently remain slightly below the 10% mark (-8.7%), but are close enough that the specter of a broad-based selloff is looming ever more clearly over the market.
Bespoke Investment Group analyzed the performance of 25 industry groups within the S&P 500 and found that 16 of them are finishing March at least 10% below their 52-week intraday highs. Four groups – real estate management, software, automobiles and parts, and commercial services – have fallen at least 20%, placing them firmly in bear market territory.
The sector-level picture is equally grim. Only 4 of 11 sectors finished last week in positive territory, and looking at which ones, the current market dynamic becomes immediately clear. Leading the way are materials (+5.41% for the week) and energy (+4.73%), followed by utilities (+2.41%) and consumer staples (+1.26%) – a textbook wartime portfolio of raw materials, energy and food.
The week's biggest laggards, predictably, were the higher-risk stocks in Communication Services (-6.45%) and Technology (-3.08%).
Investors are still actively de-risking but, fortunately, remain in the market for now. However, the point at which they simply begin to exit – selling off everything indiscriminately – is just one step away. And that is a step no one wants to see taken.
Market outlook for March 20
The week is opening on a nervous note amid a high degree of uncertainty.
Asian markets were naturally the first to set the tone, trading mostly deep in the red. The greatest pessimism is in Japan, where the Nikkei 225 is down nearly 3% from Friday's close.
European markets and U.S. index futures are hovering near flat – though this likely reflects little more than hope for some positive news, with investors reluctant to make any moves.
Pakistan is attempting to broker peace talks, but the prospective participants from the U.S. and Iran appear to be in no hurry to attend. Attacks continue across the Persian Gulf and are spreading southward, while Yemen's Houthis are striking Israel. This is understandably a source of concern, as the Houthis may attempt to choke off shipping through the Bab-el-Mandeb Strait in the Red Sea – a critical oil trade chokepoint near the Strait of Hormuz.
On the other hand, Trump has stated that he wants to "take Iran's oil" and may deploy U.S. forces to seize Kharg Island in the Persian Gulf – Iran's primary export terminal. He added that negotiations with Iran are proceeding both directly and indirectly, are going very well and may soon produce an agreement. But what if they don't?
Meanwhile, the U.S. military buildup continues and, according to various reports, more than 50,000 personnel are now in the region, including additional special forces units.
All of this suggests the conflict may drag on for some time, with the risks of further escalation remaining elevated. That would inflict additional damage on supply chains and push back the recovery timeline once the strait potentially reopens.
Looking beyond the battlefield this week, the key scheduled event will be labor market data. On Wednesday, April 1, ADP will release its March private payrolls report, with the official Bureau of Labor Statistics (BLS) figures following on Friday. Worth noting, however, is that this will be a shortened trading week – U.S. markets are closed on Friday, April 3 for Easter. All labor market data will therefore be digested by investors the following Monday.
On the corporate front, the calendar is light. We are in the earnings off-season, with the next reporting cycle still several weeks away. The one name worth watching is Nike (NKE), which reports after the close on Tuesday, March 31. Nike has a well-established history of posting significant post-earnings gaps, and options market pricing currently implies a move of ±8% from current levels – so traders should have plenty to work with.
Overall, market direction will be driven by news from the Middle East, and will hinge not so much on economic data as on the number of ships sunk. Unfortunately, that is simply the reality right now.