Markets Are Relatively Calm All Things Considered
Certainly, the massive fiscal and monetary response to the dead stop of the economy accounts for much of that moderation. But, investors also now well understand that for the next few months economic data is going to be exceptionally weak, and they’re taking it in stride. Stocks barely moved following this week’s reports on weekly jobless claims, flash PMIs, and durable goods, all of which showed the economy decelerating sharply. There is always a chance that investor reaction might be more pronounced once we get a look at April’s data, which will reflect a full month of shutdown impact. But that remains to be seen. Investors also seem to be taking the optimistic view of progress on slowing the spread of the coronavirus and the steps in some states to slowly reopen their economies, despite the continued reticence of the healthcare community. These steps to reopen will be watched carefully for their relative success, and the implications for other states.
Earnings Estimates Continue to Decline; Healthcare is the Best Performing Sector
We are now approximately one-fourth of the way through first-quarter earnings season. According to Factset, earnings are now expected to decline by 16 percent, down from an expected decline of 7 percent at the end of the quarter. There have been a few positive surprises, but the results so far have primarily reinforced expectations. Earnings expectations overall have declined, and we have seen further weakness in cyclical sectors and relative strength in growth sectors. Since earnings season began on April 14, healthcare is the best performing sector with a gain of almost 7 percent. Healthcare also happens to be the best performing sector year-to-date with a loss of 1.5 percent. Consumer discretionary is the second-best performing group since April 13 with a gain of 5.3 percent, followed by communication services, up 4.3 percent. Technology is higher by 3.8 percent, followed somewhat surprisingly by energy with a gain of 1.6 percent, but energy is the worst-performing sector year-to-date with a 42 percent loss. Financials, with the highest percentage of companies already having reported at 56 percent, are the worst performers, down 3.5 percent. Real Estate and Utilities are also lower.
With the economy locked down, consumer spending has been focused, not surprisingly, on staples. Companies with a web presence catering to groceries and household products have benefitted, while apparel has not. Travel, leisure, hospitality and restaurant groups have suffered as well. Vehicle sales have slowed sharply. Rail and trucking volumes have plunged. Technology stocks have fared relatively well, especially those benefitting from the shift to remote working arrangements and data services.
High-Profile Companies Reporting Earnings This Week
A number of companies have cut or suspended their dividends. Among the notables are Gap, Macy’s, Nordstrom, Goodyear, Ford, Delta Airlines, Boeing, Marriott, Occidental Petroleum and Schlumberger. More are expected. During the financial crisis, approximately 25 percent of S&P 500 companies reduced their dividends and we could experience something similar this time. The year-end S&P 500 dividend futures contract is down 21 percent from the start of the year. Several companies have also suspended their stock buyback programs, and more are expected.
Earnings in the second quarter are now expected to decline by 33 percent, and by 15 percent for the full year, according to Factset, as expectations have deteriorated steadily throughout the year and have accelerated to the downside in the past several weeks. But a lack of visibility into the depth and duration of the economic slowdown has caused a number of companies to eliminate their forward earnings guidance altogether. Clearly, earnings forecasts for the quarters ahead are moving targets.
This week features a number of high-profile earnings reports, including Alphabet, Ford, Merck, Starbucks, Caterpillar, UPS, Boeing, Royal Caribbean, Norfolk Southern, Microsoft, Facebook, Mastercard, Qualcomm, Tesla, Amazon, Apple, United Airlines, McDonald’s, Gilead, Visa, Exxon Mobil and Chevron. The economic calendar this week is also loaded. The advance estimate of first quarter GDP on Wednesday tops the list. The Bloomberg consensus expects annualized decline of 3.9 percent, but it might be worse. Also scheduled are personal income and spending, PCE deflator, ISM manufacturing, vehicle sales, weekly jobless claims, construction spending and consumer confidence. The Fed meets this week as well.
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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
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