My standard opening: “Hang in there! As expected, more evidence of the economic fallout, combined with a continued ramp up in global coronavirus cases, has resulted in a 24/7 stream of disturbing headlines.”
In the first quarter, which only included a few weeks of some states issuing stay- at -home orders, GDP
contracted 4.8% and Personal Consumption dropped 7.6%. The Chicago PMI for April fell to 35.4 from 47.8 the month earlier. Any reading under 50 is considered a contraction. There were another 3.8 million Initial Jobless Claims during the week. That brings the total number of first-time claims to 30.2 million since mid-March, or roughly 18.6% of the U.S. labor force. Claims have fallen each of the last four weeks since peaking at 6.9 million the last week of March. The Dallas Fed Manufacturing Activity Index nose-dived 73.7% in April. One bright note was the Conference Board Consumer Expectations Index which rose to 93.8 from 86.8 the month earlier. In other words, consumers feel more optimistic about the future than they did a month ago.
The blended earnings decline for the first quarter improved to -13.7% from a decline of -16.1% last week. Positive earnings surprises reported by companies in the Energy, Information Technology, and Health Care sectors were mainly responsible for the decrease in the overall earnings decline. The real damage will be felt in the second quarter with analysts predicting a – 36.7% year-over-year decline in earnings. Most companies are withdrawing guidance, so these forecasts are really guesstimates at this time.
On Wednesday, the FOMC left rates unchanged with the upper bound at 0.25%. Chairman Powell reiterated the Fed will use all its tools to support the economy. He also indicated that the economic forecast is “highly uncertain,” and mapped out why he believes the economy may go through a series of peaks and troughs for at least a year or more as the world battles to keep the virus under control.
I’ve been watching the fabulous documentary “The Last Dance” on ESPN. When Michael Jordan returned from his broken foot in the 85-86 season, he was only allowed to play 14 minutes a game. Making any forecasts from the recent economic data would be akin to predicting Michael Jordan’s stat line as he recovered from his injury. At the time it was thought there was a 10-20% chance that the GOAT would re-injure his foot and perhaps never recover. Within a few months MJ scored a playoff-record 63 points against the Celtics, and only missed one game the following five seasons (and of course there are the 6 NBA Championships). My point is that the future is uncertain, but it might be awesome.
The number of COVID-19 cases and related deaths continued to grow, albeit at a slower pace, or as the politicians like to say, “the curve is flattening”. On Friday there was another encouraging development when the U.S. Food and Drug Administration approved emergency use of the first drug that seems to boost recovery among COVID-19 patients. Remdesivir, Gilead Sciences’ intravenous antiviral medication, will be used for hospitalized patients with “severe disease,” such as those who need supplemental oxygen or ventilators to breathe. The agency based its decision on the results of a government study that showed Remdesivir shortened the time to recovery by 31% for COVID-19 patients in the hospital.
The stock market rallied early in the week, but then sold off to finish essentially unchanged with the S&P 500 down 0.2% while the Russell 2000 advanced 2.22%. Breadth was good, with twice as many advancing issues as decliners. Oil bounced 16.7%, the Dollar slipped 1.5%, and Gold fell 1.7%. The yield on the Ten-Year Treasury inched up 4 basis points to 0.64%. As we mentioned last week, the super low bond yields both reflect pessimism over the future and provides a great incentive to buy stocks at the same time. Confusing? Paul Krugman wrote an opinion piece in the New York Times last week which explains this dichotomy:
“What, after all, is the main alternative to investing in stocks? Buying bonds. Yet these days bonds offer incredibly low returns. The interest rate on 10-year U.S. government bonds is only 0.6 percent, down from more than 3 percent in late 2018. If you want bonds that are protected against future inflation, their yield is minus half a percent. So, buying stock in companies that are still profitable despite the Covid-19 recession looks pretty attractive. And why are interest rates so low? Because the bond market expects the economy to be depressed for years to come and believes that the Federal Reserve will continue pursuing easy-money policies for the foreseeable future. As I said, there’s a sense in which stocks are strong precisely because the real economy is weak.”
It will be the last busy week of earnings season, with 148 S&P 500 companies reporting first quarter results. The economic calendar will be light, with the Bureau of Labor Statistics jobs report for April on Friday in focus. Spoiler alert: it’s going to be ugly.
COVID-19 will continue to be the primary storyline. About half the States are partially reopening their economies in a variety of fashions, which will provide copious data on the spread of the coronavirus. There will also be data from other therapeutics, and vaccine updates.
This week’s submission for our songs from the quarantine are “Everything is Broken” and “White Cliffs of Dover”.
Bob Dylan released “Everything is Broken” in 1969. It would qualify as our second most somber submission behind the music from “Jaws”.
“Broken cutters, broken saws,
Broken buckles, broken laws,
Broken bodies, broken bones,
Broken voices on broken phones
Take a deep breath, feel like you’re chokin’,
Everything is broken”
Walter Kent composed the music to lyrics by Nat Burton for the classic “White Cliffs of Dover” in 1941.
“There’ll be bluebirds over
The white cliffs of Dover
Just you wait and see
There’ll be love and laughter
And peace ever after
My Dad, R.J. Kuby, optimist extraordinaire, submitted the tune. He actually sang it to me from memory.
Keep breathing, but not on anyone. “Tomorrow” will be here soon.
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