By Pete Biebel, Senior Vice PresidentPrint This Post
One common tension-inducing gag in old movies was to have the hero, at some point in the adventure, get stuck in quicksand. The audience would be on the edges of their seats as Dash or Lash or Errol sank slowly into the pit. Of course, help would never arrive when the star was merely knee deep in the quagmire. Things wouldn’t even get exciting until he was at least in up to his waist. Usually, the initial attempts to save him would be futile; the stick or vine used to pull him out would break. Not until our hero was up to his armpits would a savior arrive with a length of sturdy rope and rescue said hero.
The COVID-19 outbreak has had a heavy impact on the global economy. For the past two months, the U.S. economy has been sinking in the quicksand created by the contagion. In recent weeks, data on Initial Unemployment Claims, Retail Sales, Industrial Production and manufacturing indices are just beginning to indicate the depth to which our economy has sunk. The numbers are likely to decline further before the economy can pull out of the slump.
A week-and-a-half ago, on Holy Thursday, a potential savior appeared in the form of the Federal Reserve Bank, which threw out a lifeline for the markets. The flattening of the rate of increase in the number of infections coincided with the Fed’s promised support of the credit markets, so, along with a healthy helping of fiscal largesse from Congress, it all might be enough to accomplish a rescue. Maybe our hero won’t sink quite so deeply after all. Maybe the threat will have passed just that quickly. Hollywood may want a re-write of the script.
The real issue is whether the fiscal and monetary actions will provide enough rope to save the day. The market, which is always looking several scenes into the future, certainly seems to believe not only that the economy will be pulled from the quagmire, but also that it will be performing heroic feats again soon. The averages have percolated steadily higher over the past couple weeks. Following impressive low double-digit gains in the prior week, the large-cap averages all posted healthy advances again last week. The stocks leading the swell have been companies in the biotech, video streaming, online shopping and virtual networking businesses. As a result, the NASDAQ Composite Index (COMP) posted the largest advance, up a bit more than 6% for the week. The S&P 500 Index (SPX) climbed about half as much while the Dow Jones Industrial Average (DJIA) gained about 2.2%.
The market seems to believe that the economy will be back to business as usual in the near future. It’s betting that the stimulus to date, and the implied promises of more if needed, will be enough rope to pull the economy out of the quicksand. The continuation of the rebound over the past couple weeks implies that the market also is anticipating a fairly rapid economic recovery. And, that seems unlikely unless the Feds give us a lot more rope.
A second issue, which hasn’t yet come into the plot line, is how the rescue efforts might impact economic conditions later this year. The contagion has forced the shut-down or extreme decrease in business across the spectrum. Many small businesses, larger companies, municipalities, counties and states have seen their revenues plummet and are being forced deeper into debt in their efforts to survive. Many big cities and states were already teetering on the brink of solvency when the economy was expanding. Adding in the record fiscal deficit and ballooning national debt creates a new peril for an economy as it tries to regain its health. Those suddenly bloated debt levels not only risk forcing interest rates higher just as the economy is trying to recover, but also threaten that businesses will be less profitable and less willing to rehire employees.
Four weeks ago, in my article “A New Strain on the Market,” I described how the previous week’s selling had reached the panic stage. In that article I wrote, “I wouldn’t be surprised if the major averages make a good short-term low this week.” In fact, the low came on that Monday. Now, given the size and nature of the rebound over the past four weeks, I wouldn’t be surprised if the major averages made their short-term rebound highs this week. Those averages have all recovered something near the maximum percentage of their markdown phase that would typically be expected. SPX has recovered to its 50-day moving average, which would be a natural level of resistance. At this stage, it seems far more likely that, if there’s going to be a 10% or greater move in the near future, that move is far more likely to be down than up.
The video streaming and social networking companies that have led the rebound are probably all fine companies and will probably all see their revenues expand as a result of the contagion. But, many of them are now trading at levels that imply the recent growth spurt will continue unabated for the next several years. The impressive performance of those stocks last week helped sectors including Healthcare, Consumer Discretionary and Technology rack up gains of about 5% to 6%.
Unfortunately, what is lost in the ogling over those numbers is that six of the eleven S&P sectors had net losses for the week. The Basic Materials sector lost about 2%; the Real Estate sector depreciated by about 2 ½% and the Financials sector gave up more than 4%. It’s worth noting that the Energy sector, which also had a negative week, was down a mere one-third of one percent despite the price of Crude Oil plunging to an 18-year low near $18 per barrel. Another loser of note was the Russell 2000 Index of small-cap stocks (RUT). RUT has been underperforming its large-cap peers for most of the past two months. While the big boys were up 2% to 6% last week, RUT lost about 1.4%.
This is the second big week of the new Earnings Season. One or more of the 30 component companies in DJIA are scheduled to report. This creates the possibility that the Dow’s performance could vary widely from that of the broader averages on any day. More than 300 companies are expected to report on Wednesday and Thursday alone.
The consensus expectations for this week’s economic reports give an idea of the degree to which our economy has already sunk. The numbers early in the week are not likely to cause much of a move in the market. But, as was the case last week, we could see big opening gaps later in the week, either up or down, if the actual data varies significantly from the consensus on the Thursday and Friday reports.
|Tuesday 4/21/2020||Existing Home Sales, M/M||+6.5%||-8.2%|
|Wednesday 4/22/2020||FHFA Home Price Index, February||+0.3%||+0.3%|
|Thursday 4/23/2020||Initial Jobless Claims||5,245K||4,500K|
|U.S. Manufacturing PMI, April||48.5||38.0|
|U.S. Services PMI, April||39.8||31.3|
|New Home Sales, M/M||-4.4%||-15.8%|
|Kansas City Fed Manufacturing Index, April||-17||-34|
|Friday 4/24/2020||Durable Goods Orders, March||+1.2%||-12.0%|
|Durable Goods Orders ex-Transportation, March||-0.6%||-6.0%|
|Capital Goods Orders, March||-0.9%||-6.2%|
|Consumer Sentiment, April||71.0||68.0|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.