04/27/2020
By recent standards, the past two weeks have been relatively calm in equity markets. The S&P 500® index fell 1.3 percent last week, after rising 3.0 the previous week. Normally those would be typical moves, but in this environment, they seem downright somnolent. By comparison, the previous seven weeks ending April 10 included moves of -11 percent, + 1, -9, -15, +10, -2, and +12. During those seven weeks, the VIX index of implied volatility averaged 55, and peaked on March 16 at 83. However, on Friday the VIX fell 13 percent to end the week 36. And while that level remains well above its ten-year average of 17, it has declined steadily of the past month. The last three weekly closes on the S&P 500 have been 2789, 2874, and 2836, a comparatively narrow range as volatility has subsided.

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.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Individual securities referenced are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell.

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.

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.

The S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) health care sector.

The S&P 500 Consumer Discretionary Select Sector Index measures the performance of consumer discretionary stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Telecommunication Services Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) telecommunication services sector.

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Real Estate Index comprises stocks included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS)® real estate sector.

The S&P 500 Financial Select Sector Index measures the performance of financial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) information technology sector.

The S&P 500 Utilities Select Sector Index measures the performance of utility stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Past performance is not a guarantee of future results.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

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