Party Like It’s 2019

Party like it’s 2019.  Stocks rallied sharply yesterday on news that the spread of the virus may be slowing.  Good virus news outweighed bad economic data and traders jumped into the growth stocks that topped the charts in the past several years… and then some.

 

 

N O T E W O R T H Y

 

Lay out the cards, let’s. Yesterday’s rally was a big head-scratcher for many, including many of those who participated. The large cap indexes rallied along with the small caps, while the growth-stock-heavy NASDAQ surged the most as investors piled into names like Amazon, Google, Apple, and Microsoft.  There were some oddities in the mix of winners as the cruise lines, luxury goods providers, and airlines topped the list.  The losers list was a bit more logical, topped by energy names as crude oil experienced a -3.08% leg down in the wake of an underwhelming supply cut announced over the weekend.  All in all though it was a fairly broad rally.  That means that the index rallies were not attributed to just a few of the heavier weighted stocks.  On any normal day in any normal time that would be considered quite healthy and with the S&P500 now around -15.1% below its recent high, there would be cause for a celebration… on any normal day in any normal time.  But as we all know, things are anything but normal these days.  Let’s look at some of the facts that we received in the past few days.  First the good. Evidence is hinting that new Coronavirus cases are slowing in the US, cases have plateaued in hard-hit Italy and Spain, and the US epicenter New York is experiencing what appears to be a decrease in ER admittances. On the therapeutic side of things there appears to be many companies pursuing some form of vaccination with at least one company in clinical trials. Gilead is conducting phase-3 testing of their Remdesivir for COVID-19 treatment, and at least one company has received FDA approval to test for COVID-19 antibodies.  All great news, but by no means does the end of the crisis appear just around the corner.  On the economic front, the International Monetary Fund announced that its economists predict that the global economy will shrink by -3% in 2020, revising its +3% growth prediction from January.  Goldman Sachs is a bit less sanguine, predicting that the US economy will contract by -35% in this quarter alone.  The Federal Reserve has done a great job at ensuring that the US financial system has means to support the economy through the upcoming quarters by providing massive liquidity, providing direct loans, purchasing lots of corporate and municipal debt, and by lowering all borrowing costs to near 0%.  Banks appear to be bracing for the worst as we learned in yesterday’s earnings announcements from JP Morgan Chase and Wells Fargo.  The banks are on the front lines of the economic pause as they have and continue to provide medium and large companies with the necessary capital to keep the lights on.  JP Morgan announced yesterday that it had added $6.8 billion in loan loss provisions affecting its earnings, which were still positive but more than -$1 per share below analyst expectations. Loan loss provisions are set aside for loans which the bank believes are in danger of defaulting or renegotiating.  Wells Fargo similarly increased their loss reserves but by a smaller $3.1 billion.  On a more down-to-earth level I spoke with a real estate developer yesterday who lamented that his lines of credit, which had been suspended as the crisis ensued, would most likely continue to remain on hold for another 30 – 60 days. Developers rely on the credit lines to make quick purchases of properties before formally mortgaging the properties or even reselling them.  The lack of these funding sources, which are underwritten by large banks and financial institutions, have ground small and mid-sized real estate investment to a halt.  As there are no protections for lenders if borrowers enter forbearance, lenders may be reticent to loan money for an extended period of time.  At the local level this will certainly impact jobs during what is traditionally the industry’s boom quarters.  I know I am going out of order here, but I have one more bit of positive news to share. Apple announced yesterday that iPhone sales in China were up by +416% from March to April. Though the number of units sold is still -23% less than a year ago, it still shows that once economies go off of pause consumption that it begins again rather quickly. This is a good sign, though the length of the pause is anyone’s guess at this point.  Further, as alluded to above, some companies may not make it to that point. Now, more than ever, investors must be diligent and diversified.

 

THE MARKETS

 

Markets rallied yesterday on further hopes that there may be a light at the end of the coronavirus tunnel, though distant.  Earnings season began yesterday with no shocks but with signs of the pandemic’s impact all over the reports.  The S&P500 rose by +3.06%, the Dow Jones Industrial Average climbed by +2.39%, the Russell 2000 traded up by +2.09%, and the NASDAQ Composite Index jumped by +3.95%.  Bonds traded up and 10-year treasury yields dropped by -2 basis points to 0.75%.

 

NXT UP

 

– Retail Sales are expected to have fallen by -8.0% in March compared to a decline of -0.5% in the prior month.

– Empire Manufacturing Index (April) may have declined to -35 from -21.5 in March.

– Industrial Production is expected to have retreated by -4.0% in March compared to the prior month’s +0.6 increase.

– NAHB Housing Market Index (April) may have fallen to 55 from last month’s read of 72.

– The Federal Reserve’s Beige Book will be released and will detail economic conditions across the country’s various Fed Bank regions.

– This morning UnitedHealth Group beat expectations while PNC Financial, Bank of America, and US Bank Corp missed targets.  We will hear from Citigroup, Charles Schwab, and Goldman Sachs before the bell. After today’s close Bed Bath & Beyond will announce their results.

 

daily chartbook 2020-04-15