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The Dow Is Plunging Because the Crude Oil Meltdown Isn’t Over Yet

Last Updated September 23, 2020 1:50 PM
Francois Aure
Last Updated September 23, 2020 1:50 PM
  • The Dow Jones struggled for a second straight day on Tuesday.
  • Crashing oil prices continue to be a major headwind for the U.S. stock market.
  • Oil stocks Chevron and Exxon Mobil continue to resist gravity, despite the plunge in WTI futures.

The Dow Jones suffered another precipitous downturn on Tuesday, as the wild moves in the price of crude oil continued to spook Wall Street.

Yet faced with rapidly-disappearing storage capacity and even more supply on the way, the Dow’s two oil stocks – Exxon Mobil and Chevron- were surprisingly resilient to the carnage in the energy sector.

Dow Jones Stumbles as Oil Rout Deepens

Dow Jones, Stock Market, Oil Price, Chevron,
The Dow Jones plunged on Tuesday as the oil price collapse bled into the June contract on WTI futures. | Source: Yahoo Finance 

All three of the major U.S. stock market indices  fell around 2% on Tuesday:

  • The Dow dropped 447.33 points or 1.89% to 23,203.11.
  • The S&P 500 slid 2.34% to 2,757.04.
  • The Nasdaq tumbled 2.65% to 8,333.53.

While the coronavirus outbreak is driving most of the weakness in the Dow, the crisis in the energy markets is what’s sucking up all the media attention.

After the price of crude oil technically tumbled into negative territory on Monday, Tuesday brought nothing but more chaos. The June contract on WTI futures was bludgeoned by a 35% decline, and it briefly crashed as low as $6.50 per barrel before recovering to $13.

Donald Trump pledged to support the oil sector, which may provide some relief to oil supermajors. But it will do little to reverse the mass of layoffs building  as rigs and wells go offline.

Donald Trump, Oil, WTI, Chevron, Exxon Mobil
Source: Donald Trump via Twitter 

All this points to another emergency OPEC meeting, where additional cuts must surely be on the table.

Sebastian Galy at Nordea Asset Management certainly believes this is the inevitable outcome, telling CCN.com,

With an active front month of the WTI well south of $20 and oil storage capacity on and offshore close to maximum capacity, one can be sure that the alarm bells are ringing, which means the next OPEC+ round is around the corner.

Guggenheim CIO Defies Dalio, Favors Bonds Over Stock Market

All this uncertainty has Dow members like IBM pulling their forward guidance . Amid plunging demand, the Fed printer cannot keep assets elevated forever. Bears are losing confidence in equity indexes like the Dow and S&P 500 as they search for safer places to park their money.

Guggenheim CIO Scott Minerd – who correctly called the stock market crash at the start of the year  – anticipates that there is more pain ahead for equity prices.

He urges investors to steer clear of the S&P 500 and favor bonds:

But one thing I would caution is that if earnings continue to fall as I expect them to, S&P earnings could get as low as $100 this year. Given the traditional market multiple of about 15 times earnings, that would put the S&P at about 1,500, still about a thousand points lower than we are today.

Certainly, we are down from the recent peak of 3,386, so we’ve made a big move, but we still have a pretty good move to make. Investors should probably focus their activity on bonds at this point.

It is interesting to see Minerd continue to push for opportunities in bonds, as Bridgewater’s Ray Dalio is advocating for precisely the opposite strategy . Time will tell who gets the last laugh.

Dow Stocks: Falling Oil Price Doesn’t Cripple Chevron & Exxon Mobil

chevron stock, oil price
Big oil stocks Chevron and Exxon Mobil were a surprising source of stability within the Dow today. | Source: Source: Jonathan Weiss/Shutterstock.com

On a rough day for the Dow 30 , energy giants Chevron and Exxon Mobil were surprisingly strong as WTI pressed below the $10 handle. XOM edged 0.3% higher, while CVX fell around 1.2% despite the historic hit to crude prices.

The Dow Jones’ most heavily weighted stocks, Apple and UnitedHealth Group, were both under pressure. They recorded losses of 2.6% and 1.9%, respectively.

Travelers stock traded 1.1% higher after its quarterly report, despite showing subdued earnings.

Coca-Cola actually beat estimates , but investors hoping the food and beverage industry would be a safe haven from the coronavirus will be disappointed by a substantial 25% drop in global sales volume. KO shares slid 2.7%.