April Showers

April showers.  Stocks advanced on Friday as investors looked beyond the horizon and had hope that better days will come. Congress approved the next leg of stimulus and Administration officials hinted of help for oil producers while Georgia became the first state to relax lockdowns – all leaving investors cautiously hopeful.

 

N O T E W O R T H Y

 

Actual reality in a virtual world.  As we attend meetings, classes, family events, and even happy hours in the virtual world of video chatting we are all quite cognizant of what is happening outside of our homes in the real world of business.  WHILE YOU SLEPT, the Rolling Stones, fronted by 76-year-olds Mick Jagger and Keith Richards, even released their first new song in many years entitled Living in a Ghost Town with lyrics like “Then we got locked down” and “It’s a party of one”.  The song, already a hit, reflects how many of us feel about the current situation as we see unemployment rise and our once-bustling economy grind to a halt. You wouldn’t know that by observing the stock market, though.  Friday marked the one month mark since the S&P 500 hit its low in the wake of the Coronavirus outbreak in the US and since that low the index has climbed by +26.79%, even in the wake of mounting deaths, unemployed, and corporate bankruptcies.  Sure, the government has stepped up in a big way with stimulus and some of the pandemic stats suggest that we are at or near the worst of things, but much of the market gains happened in the two weeks after hitting the lows when any hints of good news were hard to find.  We can probably thank speculators for the initial bounce who swooped in for deep discounts hoping for a sustained pop in prices.  Whether the turn-around will hold or not is anyone’s’ guess at this point, as we are just beginning to really see the actual damage to the economy and corporate income statements. Here is where I have to remind everyone that stock prices, theoretically, reflect a company’s returns far beyond this quarter or next, factoring in returns in perpetuity.  Perpetuity means forever and that’s a mighty long time, to use the immortal words of departed rocker Prince.  That is good news for stock holders because we know that, though things are really, really bad today, the situation will improve at some point.  Many economists are expecting GDP declines in the first two quarters with sharp recoveries in the third and fourth quarters.  So while we will log a recession in the record books, economists expect it to be short.  Even if they are off by one or two quarters, stocks of healthy companies should reflect the better days that lie beyond the recession.  It would seem that consumers have a very similar outlook as well.  On Friday, the University of Michigan’s Sentiment Index showed that respondents’ sentiment about the current situation was similar to that of late 2009 right as the Great Recession was ending.  Respondents’ expectations about the future were on par with sentiment in early 2014 which was when the economy was growing soundly and above the low expectations logged in the 3-year period after the recession ended. From this we can see that investors and consumers alike are hopeful about the future.  Long term investors will take comfort in these facts, but I do have to offer up some caveats.  We are just at the beginning of the painful economic and corporate data. The Congressional Budget Office expects GDP to shrink by an annualized -39.6% in the second quarter before rebounding in the final quarters of the year. Unemployment is expected to reach a peak of 16%.  In this type of environment it is very difficult, if not impossible to predict corporate performance.  We will get a snapshot of how companies did in the past few months as we enter peak earnings season in the week ahead.  We may get a glimpse into how companies plan to move forward with lower revenues during earnings calls. Finally, we must recognize that while politicians are focused on restarting the economy and markets are certainly reflecting some optimism, the markets are still volatile.  The VIX volatility index is back down in the mid 30’s which is a good sign but still quite high by historical standards. With the VIX trading at 35, we can still expect 10% monthly swings in either direction, so while our current path will eventually lead us to better times, there are still many trials and tribulations ahead of us.

 

THE MARKETS

 

Stocks climbed on Friday in a late day surge as investors applauded the $480 billion rescue package approved by Congress.  The S&P500 rose by +1.39%, the Dow Jones Industrial Average climbed by +1.11%, the Russell 2000 advanced by +1.56%, and the NASDAQ Composite Index traded up by +1.65%.  Bonds rose slightly and 10-year treasury yields remained flat at 0.60%. Crude oil rose by +2.74% as Stephen Mnuchin suggested that the Administration was considering some type of support package for the energy sector..

 

NXT UP

 

– Dallas Fed Manufacturing Index (April) is expected to be -75 compared to the last reading of -70.

– The week ahead will feature a number of key economic figures including housing numbers, regional Fed reports, Consumer Confidence, GDP, Personal Consumption, PCE Deflators, and of course the closely-watched weekly Initial Jobless Claims.  This week the FOMC will meet and announce rate policy which is largely expected to remain unchanged, but the press conference that follows the meeting will be closely monitored. We will also get a lot of corporate earnings in the week ahead including announcements from the FAANGS, healthcare sector, and energy sector.  Please refer to the attached economics and earnings calendars for details.

daily chartbook 2020-04-27

econ numbers 4_27

earnings releases 4_27