Healing Effects

Healing effects.  Stocks rose yesterday on positive news that Gilead’s Remdesivir drug may be effective in treating the Coronavirus.  Gross Domestic Product took a hit in the first quarter surprising no one and the Fed still has our back.

N O T E W O R T H Y

Considerable risks.  His words, not mine.  His, meaning Fed Chairman Jerome Powell.  Yesterday was Fed day, which is usually a big deal for markets, but you would hardly know it given the positive market-driving news of the morning. Let’s just start with that to get it out of the way.  First thing in the morning Gilead announced that its drug Remdesdivir, which has now become somewhat of a household name, showed positive results in treating Coronavirus patients in human trials.  The results are somewhat contradictory to a Chinese study, published in the Lancet, the results of which were accidentally leaked on the WHO site last week causing the company’s stock to plummet.  To make things clear, Dr. Anthony Fauci, the nation’s de facto primary care physician, told reporters that the drug had “clear-cut, significant positive effect” at lowering the recovery time from the virus.  The news and affirmation pushed stocks higher and they never looked back.  The White House announced that the FDA would be fast-tracking the drug for approval and Gilead is rushing to make the treatment ready to be delivered in greater quantities.  That is, of course, great news and a very positive development.  Unfortunately, mass deployment is many month’s away as is a yet to be discovered vaccine that would possibly prevent the spread of the virus.  Lowering the death rate and significantly containing the virus through a combination of therapies is THE key to getting Americans back to work and the economy humming again.  First we must heal the nation before the nation can heal the economy.  On the topic of the economy, we got some less-than-positive results from the Bureau of Economic Analysis.  First Quarter Annualized GDP Growth dropped by -4.8% after growing by +2.1% in the prior quarter.  The pullback represents the largest quarterly drop since the last recession.  The drop was larger than economists were expecting, though few were surprised and the markets barely responded to the grim report.  Breaking down the results we note the following.  On the consumption side (representing more than 2/3 of the economy) the biggest drops came in Motor Vehicles (-33.2%), Clothing and Footwear (-36.0%), Transportation Services (-29.2%), Recreation Services (-31.9%), and Food Services / Accommodations (-29.2%).  On the investment front, which represents investments made by companies (representing almost 1/5 of GDP), notable declines came in Manufacturing (-24.6%), Computer Equipment (-29.6%), and Transportation Equipment (-30.6%).  On a good note, investments in Single Family Residential Structures grew by +33.5% last quarter, up from the prior quarter’s growth of +16.3%.  That was a lot of numbers, but even if you just quickly browsed over them you would note that these are areas in the economy which you would expect to be impacted by the nationwide pause.  I broke them down for you here because it is important to recognize that while the economy will come back, not every sector will come back at the same pace. Further, these first quarter results only include roughly one month of the post-COVID economy. Economists, and most of us for that matter, are bracing for a more severe pullback in this current quarter, though we won’t get those results until late July.  Speaking of economists, the FOMC announced their policy decision yesterday afternoon and, as largely expected, they left rates unchanged… near zero.  The Fed offered up no new policy measures to stimulate the economy, which was also largely expected.  In the more important press conference that followed, the Fed Chairman basically stuck to the script stating that the Fed would do whatever it takes to continue to support the economy.  The Fed mentioned that rates would remain low until employment was once again stable (meaning low unemployment again), which many economists expect will be beyond 2021.  The Fed warned that it expected sharp drops in economic growth and increases in unemployment over the near term. Further, the Fed warned that the pandemic “poses considerable risks to the economic outlook over the medium term.”  In economic terms, the medium term refers to a period beyond the next two quarters.  The statement can be interpreted to mean that the Fed is likely expecting a U-shaped recovery and not the V-shaped recovery we are all hoping for.  Regarding that, economists are admittedly bad at forecasting and timing economic events and clearly these forecasts are fluid, changing constantly with no real historical analog to refer to.  Finally, the length of the bend in the “U”, as we all know will largely be dictated by the massive efforts being made in the healthcare industry to find a viable therapy for the virus.

THE MARKETS 

Stocks rose sharply yesterday on news that Gilead’s human trials yielded some encouraging results in treatment of the Coronavirus.  The positive news overshadowed weak economic numbers and the Federal Reserve stuck to its current policy.  The S&P500 rose by +2.66%, the Dow Jones Industrial Average climbed by +2.21%, the Russell 2000 traded up by +4.83%, and the NSADAQ Composite Index surged by +3.57%.  Bonds advanced and 10-year treasury yields rose by +1 basis point to 0.62%.  Crude oil had a positive day, rising by +22.04% on news that inventories rose less than expected.  WHILE YOU SLEPT Norway announced that it would cut crude supply for the first time in 18 years, which has helped prop up crude futures overnight.  In other energy news, Shell cut its dividend and Exxon Mobile maintained its dividend at the current level, the first freeze in 13 years.

NXT UP

– Personal Income (March) and Personal Spending (March) are expected to have declined by -1.5% and -5.0% compared to the prior month’s growths of +0.6% and +0.2%, respectively.
– PCE Core Deflator (March) is expected to be 1.3% year over year compared to the last reading of +1.8%.
– Initial Jobless Claims (April 25) is expected to show that 3.5 million Americans filed first time claims for unemployment benefits.  This would represent a slowdown from last week’s 4.427 million claims.  This increase would bring the total of unemployed in the past 6 weeks to 30 million.
– This morning Dow, Six Flags Entertainment, Dunkin’ Brands, Cigna, Conaco, and Kraft/Heinz beat estimates, while Hanesbrands, McDonald’s, Comcast, and Twitter missed.  We will hear from Hilton, Goodyear Tire and Rubber, and Kellogg before the bell and after the bell announcements are expected from Cabot Oil and Gas, Public Storage, Western Digital, MGM Resorts, Visa Ince, Fortune Brands, Gilead Sciences, US Steel, Whirlpool, United Airlines, Apple, and Amazon.

Please call if you have any questions.

Best regards,

Mark

daily chartbook 2020-04-30