Stocks closed down for a second straight day as the carnage in the oil market shows no signs of slowing down anytime soon.
The Dow Jones Industrial Average dropped 2.6% or 630 points, bringing its two-day slide to over 1200 points. The S&P 500 lost 86 points and fell 2.7% while the Nasdaq fell nearly 300 points to lose 3.5%.
After Monday’s chaotic trading in oil futures that saw the expiring May contracts trade at a negative amount, Tuesday’s trading saw the same dramatic decline in June’s contracts, which slid 43.4% to close at $11.57 per barrel.
The steep decline in the value of the futures contracts has a popular oil ETF scrambling to restructure in an attempt to avoid
The United States Oil Fund ETF (USO), a popular way for retail investors to invest in the oil markets, fell by 25% yesterday. This took place as investors scrambled to exit as quickly as possible. The ETF usually trades around 100 million shares per day, but yesterday saw almost 992 million shares traded hands.
Oil Plunge Continues
The ETF holds primarily oil futures contracts. With Monday’s upheaval, trading in the ETF was halted before the market opened on Tuesday. It happened as the fund took drastic measures to avoid further losses. Previously, the fund invested in the front-month oil futures and rolled to the next month as the expiration date approached. With almost 80% of the fund in the front-month and 20% in the second month, the May wipeout on Monday meant huge losses that got even worse on Tuesday as the second-month June contracts took a beating.
The fund filed regulatory paperwork that now allows it to buy any monthly availability at any percentage it sees fit. The fund now holds a mix of June, July and August contracts.
Kyle Bass, CIO of Hayman Capital Management has been warning investors about underlying challenges of ETF that try to track the price of oil using futures contracts.
On a CNBC appearance Monday, Bass said “Retail has been plowing into these oil contracts thinking they’re buying spot crude oil when they’re buying the next front month. So they’re paying $22 a barrel when the spot market’s negative $38. Retail investors are going to get fleeced if they continue to fly into these oil ETFs.”
Other Markets That Fell
Oil prices weren’t the only drag on the markets. IBM, Merck and Boeing all slid more than 3% on Tuesday.
IBM fell 3.03% after it reported that net income fell 26% quarter-over-quarter. Their revenue also decreased by 3.4% amid the spread of the coronavirus. The company also withdrew all 2020 guidance due to the pandemic.
Merck dropped 5.46% and Boeing fell 5.07%. With this, Boeing announced late last night that it was creating a new division that would focus on “protecting its supply lines” and “preparing now for the post-pandemic industry footprint.”
The lone bright spot yesterday was news that Senate Democrats and Republicans agreed to provide $320 billion in additional funding for the Paycheck Protection Program. The program ran out of money last week as millions of small businesses applied for $350 million in loans from the SBA.