Rising To The Surface

Rising to the surface.  Stocks rose yesterday as traders cheered a turn-around in crude oil.  Mixed earnings, as expected, added some volatility but the advancing of a new stimulus package on Capitol Hill added fuel to yesterday’s rally.

 

 

N O T E W O R T H Y

 

Make a list, keep checking it. 

Yesterday’s rally in stocks was a relief for many investors watching the value of their accounts go up and down like a yo-yo.  With yesterday’s rally coming on the heels of two selloff days in which stocks gave up almost -5%, many casual observers are growing more and more confident that perhaps, the hard stuff may be behind us.  Unfortunately, as the facts would have it, we still have a long row to hoe in front of us.  To be fair, we are making progress but there are still as yet, many unchecked items on the list.  Let’s look at the list.  1) The US Economy, status: still unknown – The economic numbers being reported are just beginning to reflect the negative impact of shuttering businesses across the nation.  We are able to observe the mounting job losses which will certainly impact discretionary spending.  Folks fortunate to still remain employed may not be so fast to rush out and make big purchases as consumer confidence is beginning to decay. Many experts expect the economy to begin to turn around in the fourth quarter after a sharp drop this quarter and next.  2) Corporate health, status: still unknown – We are in the thick of earnings season, Q1 earnings to be exact.  That’s right, we are learning about corporate profits for the quarter that ended March 31st.  Though much of the nation was already hunkering down by the end of the quarter, January and February were still business as usual for many, so Q1 results are not an accurate representation of how strong a company may be right now. Management discussions usually feature confidence that things will rebound once the economy switches back on… obviously. Unfortunately, very few, if any of them are willing to gander just how long that may take.  In fact, companies continue to withdraw forward guidance.  We do know that companies are hoarding cash by borrowing lots of capital, slashing salaries, and curtailing capital spending.  To be clear, withdrawing guidance and stockpiling cash does not imply that a company is unhealthy. Quite the opposite, the conservative actions are usually met with applause.  It is however still too early to know just how much this economic pause will have on many companies.  3) Crude oil, status: still unknown. The energy sector only makes up around 2.5% of the S&P500, but the health of the sector has many far reaching effects that go beyond the sector itself.  As we learned over the past few weeks, supply and demand are actually real and when those get misaligned… well you know.  The fact remains, despite yesterday’s improvement in crude oil prices, demand is weak and a glut of supply is threatening overflow in storage facilities.  That will change eventually, but only when the world gets back on its feet.  4) Proven therapy for COVID-19, status: still unknown.  Currently there are 83 vaccines in development globally while 6 are in human trials.  Experts are hopeful that a therapy will be available as early as the first quarter of 2021.  There are signs that the curve is flattening in some of the nation’s hotspots. Unfortunately those positive developments are the result of the lockdown, which is the driver of this economic calamity.  While some states are aggressively pursuing a lifting of restrictions others are taking a more conservative approach.  In either case, activity will be limited until there is a proven therapy.  5) The Federal Reserve, status: KNOWN. The Fed has been aggressive in pumping liquidity into the economy, supporting the bond markets, helping small and mid-sized business and municipalities, strengthening banks, lowering borrowing costs, etc.  The Feds efforts have been swift and impactful.  The Fed appears to be ready to continue their support and even expand it, if necessary.

 

The markets favor knowns and have disdain for the unknowns. The list above is simple, but it covers the principal drivers for the market’s near term strength.  Out of five items, four still remain unknown.  Until we can cross off those remaining items, markets will remain volatile.  Those items are not independent either.  If we can cross off item #4, all others will follow quite quickly.  Not only is the nation’s health in the hands of Doctors, Nurses, and Healthcare Workers, but also the nation’s economic prospects. The stock market, status: hopeful.

 

THE MARKETS

 

Stocks rallied yesterday following crude oil’s recovery and hopes that the next leg of stimulus, approved by the Senate, will ensure the health of struggling companies.  The S&P500 rose by +2.29%, the Dow Jones Industrial Average traded up by +1.99%, the Russell 2000 climbed by +1.39%, and the NASDAQ Composite index jumped by +2.81%.  Bonds slipped and 10-year treasury yields climbed by +5 basis points to 0.61%.  The June WTI contract rose by +19% but still remains low by historical standards.

 

NXT UP

 

– Initial Jobless Claims (April 18) is expected to show that 4.5 million Americans filed for unemployment coverage for the first time compared to last week’s 5.245 million.  Watch this one carefully!

– Markit Manufacturing PMI (April)  is expected to have fallen to 35.0 from 48.5 while Services PMI is expected to have declined from 39.8 to 30.0.

– New Home Sales (March) may have fallen by -15.8% after falling -4.4% in the prior period.

– Kansas City Fed Manufacturing Activity (April) is expected to come in at -37 compared to the prior month’s -17.

– This morning Eli Lilly, Pulte Group, Old Dominion Freight, Citrix Systems, and Union Pacific beat expectations while Air Products, Invesco, and Blackstone Group disappointed.  After the bell announcements include Capital One, VeriSign, Intel, eHealth, and E*TRADE Financial.

 

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