Markets Today

U.S. stocks took an inexplicably steep dive in the late morning on Thursday, leading investors to wonder what the catalyst may have been. By the end of trading on Thursday, much of those losses had been pared, but the question remained as to what may have caused the fast sell-off. The most obvious culprit was simply a sudden news-driven rise in investor concern over the potential effects of the fast-spreading coronavirus on the U.S. and global economies. Especially with major equity indexes so close to new record highs, any downturn in investor sentiment is apt to result in quick sell-offs due to profit-taking.

As we discuss below, there are increasing warnings that an outbreak which has thus far been confined mostly to China may at some point become a global pandemic. The U.S. government has begun to prepare for just such a possibility. And while China has been trying to inject some stimulus into its own economy by lowering interest rates amid the devastating outbreak (also discussed below), it remains to be seen whether that will be enough to fend off severe damage to China's economy.

After the dust settled on Thursday, stocks ended up with only mild losses. The S&P 500 closed down 0.38% while the Nasdaq Composite fell by 0.67%. The Dow Jones Industrial Average ended up only around 0.44% lower after having dropped by roughly 3 times that during the worst of the rout on Thursday.

Headlines:

Lex Wexner, CEO and Chairman of L Brands (LB), is stepping down, and has agreed to sell his 55% stake in the Victoria's Secret underwear brand to private-equity firm Sycamore Partners for $525 million. He will keep his seat on the board of L Brands, and L Brands will keep a 45% stake in Victoria's Secret. In addition to the brand's financial troubles under Wexner, Wexner has also attracted unwanted attention as CEO for his past ties to Jeffrey Epstein, who had previously been his money manager.
UBS Group (UBS) hired Ralph Hamers to be its new CEO, starting on November 1. The change comes as they try to focus more on digital banking. Mr. Hamers previously helped ING Group (ING) to focus more on digital banking, allowing it to cut costs by closing many of its physical branches.
Enterprise software firms Kronos and Ultimate software are merging. The two companies make human resources software, and the combined deal would value the companies at about $22 billion, including debt. The resulting company will be majority owned by private equity firm Hellman & Friedman, while fellow private equity firm, Blackstone Group, will hold the largest non-controlling stake.
Goldman Sachs and JPMorgan agreed to fund a new stock exchange that will launch this summer. The introduction of the new exchange, called Members Exchange and nicknamed MEMX, is meant to put pressure on existing exchanges to lower the prices that they charge financial firms such as Goldman and JPM.

China Cuts Loan Prime Rate, Boosting Chinese Stocks

Though U.S. stocks fell on Thursday, Chinese stocks surged in the preceding Asian session when China's central bank showed positive signs that it's actively attempting to ameliorate the negative effects of the coronavirus on the Chinese economy. The People's Bank of China announced that it would lower the benchmark lending rate. The one-year loan prime rate was lowered by 10 basis points. Such moves are meant to stimulate the economy by making it cheaper for individuals and businesses to borrow money. Investors in China breathed a sigh of relief, pushing the benchmark Shanghai Composite index up by 1.84% during China's Thursday trading session.

If you're wondering how Chinese stocks have been reacting to the coronavirus outbreak and spread, here's a one-year chart of the Shanghai Composite. The big drop after the gap is when Chinese equity markets re-opened in early February after the Lunar New Year break. Nearly as significant is the sharp rebound that has occurred since that massive drop, despite the continuing spread of the COVID-19 virus.

Morgan Stanley to Buy E*TRADE for $13 Billion

In the latest shake-up in the online brokerage industry, E*TRADE (ETFC), one of the original internet brokers, is being sold to legacy Wall Street bank Morgan Stanley (MS) in an all-stock deal worth $13 billion. With five million retail customers and $360 billion in assets, as well as an online bank, E*TRADE will bring new customers into Morgan Stanley’s traditional world of asset management, lending, and securities trading. The combined companies will have $3.1 trillion in client assets, 8.2 million retail client relationships and accounts, and 4.6 million stock plan participants.

Goldman Sachs reportedly also mulled over a potential acquisition of E*TRADE but ultimately decided to pass. Morgan Stanley's announcement occurs in the wake of Charles Schwab's announcement last fall that it would acquire TD Ameritrade for $26 billion.

Shares of E*TRADE popped more than 27% Thursday morning before ending the day up nearly 22%. Meanwhile, Morgan Stanley dropped more than 4% on Thursday's news. This is a common market reaction to an acquisition announcement — acquirees tend to surge while acquirers often take a hit.

Here's a chart of ETFC showing the massive jump on Thursday:

U.S. Prepares for Global Pandemic

As the COVID-19 virus continues to plague China and, increasingly, other countries, the U.S. is preparing for what may become a global pandemic. The U.S. Centers for Disease Control (CDC) has been asking hospitals in the U.S. to prepare for a potentially overwhelming influx of patients to emergency rooms, as well as possible widespread shortages of medical supplies, including high-demand items like face masks. For its part, the FBI has begun to order large quantities of masks and sanitizer in accordance with the Bureau's "pandemic preparedness" plans.

While U.S. markets have not been significantly affected by coronavirus worries other than a relatively shallow pullback of around 3.5% for the S&P 500 in late January, analysts have been warning that the potential effects of the outbreak on economies, including the U.S.', have been substantially underestimated. Some analysts are even warning of a possible near-term correction. With stocks just off record highs, it may be well worth heeding these warnings.

(chart courtesy YCHARTS)

Domino’s Pizza jumped by more than 25% after it posted higher sales and earnings than expected. It managed to do so even as it faces more and more competition from companies like UberEats and DoorDash. E*Trade Financial rose today after news broke that it was being purchased by Morgan Stanley. Cloud storage firm Dropbox gained after it beat earnings estimates.

Medical services firm Mednax dropped after it announced that insurance giant UnitedHealth Group is ending its contract with it. Media conglomerate ViacomCBS dropped after reporting lower-than-expected earnings, as did amusement park operator, Six Flags, which slashed its dividend substantially as well.

Word of the Day

Acquisition

An acquisition is when one company purchases most or all of another company's shares to gain control of that company. Purchasing more than 50% of a target firm's stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders. Acquisitions, which are very common in business, may occur with the target company's approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.

Today in History

February 20, 1792

Today in 1792, U.S. President George Washington signed the Postal Service Act which established the U.S. Postal Service. Unlike today, for much of the 19th century the Postal Service was the largest part of the federal government, employing more people in the 1820’s than either the peacetime army or the rest of the federal civilian bureaucracy combined. The Postal Service helped tie the country together in a number of important ways. Mail contracts were important early sources of revenue for both the burgeoning steamboat and stagecoach industries. It also boosted the early newspaper industry, which made up the majority of mail carried, as newspapers received lower rates than personal letters. In addition, unlike many European mail services, which only served towns that were large enough to make service profitable, the U.S. Postal Service served many more rural areas. These institutions of communication and transportation went a long way towards bringing the U.S. together as a country in its early days.

Sources: Politico and "What Hath God Wrought," by Daniel Walker Howe