Daily Market Notes: 4-6-2020

Believe it or not, after Friday’s historically awful jobs report, the market opened sort of steady and remained that way for the first 30 minutes of trading before things collapsed to the downside as investors looked ahead to the likelihood that even worse numbers are on the way.

Stocks initially held steady after the government said U.S. employers cut 701,000 more jobs than they added last month, the first drop in nearly a decade. Many businesses have slammed to a halt amid attempts to slow the spread of the coronavirus outbreak, and investors were fully expecting to see such abysmal numbers.

But the market headed lower after 10am as mentioned as has become typical in recent Fridays, investors looked to get out of stocks ahead of the weekend, which could be filled with even more bad news. The losses accelerated after Governor Cuomo of New York announced the biggest daily jump yet for deaths caused by the coronavirus in the country’s hardest-hit state.

As a result, the Dow fell as much as 550 points at 2pm before clawing its way back a bit to end with a closing decline of 361 down to 21,052. It was hurt by losses in DIS, IBM, 3M INH and V. The S&P fell by 38 to 2489 while the Nasdaq lost 114 to 7373 and the awful Russell 2000 Index of small stocks gave back 34 to 1052.

Breadth numbers were poor at a 1 to 1.5 downside ratio and the VIX once again continued to slide with a loss down to 46.8 which was the lowest level since March 6th. On that date the S&P was 2972, much higher than it is now which means that the VIX has remained the same as the market has continued to decline. This means either that it got way too high when it reached a record 86 a few weeks ago during the most intense selling or that it is too low for this level of the market and could go back up again, and let us hope that this is not what is going to happen because that would mean that the major indices would have to continue to decline. This was now the third week out of the past four that the major indices have ended lower. The lower VIX is also a function of the fact that the overall swings are much less violent in both directions after what we had seen during the week prior to this and those that preceded it.

The jobs report itself was really awful because it was the first negative one since September 2010 and pushed the unemployment rate up to 4.4% which was the highest since August 2017. And it used the survey week of March 14th which was before things really collapsed as the data was from before widespread stay at home orders were issued. We will go into the job situation in more detail in tomorrow’s Weekly Market Comments. Average hourly earnings rose by 0.4% and the yearly rate went up to 3.4% mainly because the bulk of the layoffs were in lower paying jobs.

The largest area of decline came in the leisure and hospitality one (hotels, restaurants, cruise ships, airlines). The only area to show growth was healthcare, no surprise here either. This report officially ended the record 113 straight months of job growth that have taken place since the end of the financial crisis.

Potentially scary events coming up on the calendar include this Thursday’s weekly report on applications for unemployment benefits, which has been the closest thing to a real-time measure of how ferociously layoffs have swept the country. Companies will also soon begin reporting their profit results for the first three months of the year, with reporting season beginning in earnest the week after this one. Next month’s jobs report may even show the economy has wiped away the last of the 22.8 million jobs created during its nearly decade-long hiring streak.

Most of all, investors will be watching the number of new coronavirus cases. Only the peak in that can give some clarity on how long the economic downturn will last and how deep it will be. The S&P is now down by 26.5% since its record set in February, reflecting the growing assumption that the economy is set to slide into a sudden, extremely sharp recession.

The panic selling that dominated the first few weeks of the sell-off has eased a bit since Washington unleashed massive amounts of aid to help markets and the economy. The Federal Reserve has promised to buy as many Treasury securities as it takes to keep lending markets running smoothly, and Congress approved a $2.2 trillion rescue plan for the economy. Together, these actions are staggering and unprecedented and will go some distance toward helping to cushion the economic blow of this health crisis and hopefully help get the country back on track sometime in the future.

The United States has more than 300,000 confirmed cases of the virus, which leads the worldwide tally of more than 1 million. For most people, the coronavirus causes mild or moderate symptoms, such as fever and cough. But for others, especially older adults and people with health problems, it can cause more severe illness, including pneumonia, and death. More than 60,000 people have died, but over 225,000 have recovered.

Businesses that were just hanging on before the outbreak because of the then-strong economy may not survive. Retail chains and malls in particular are under threat.

Markets got a bit of a lift Friday from another gain in oil prices as crude climbed by 11.9% to $28.34 per barrel, adding on to its nearly 25% surge the prior day on expectations that Saudi Arabia and Russia may dial back their price war. The world is awash in oil as demand for energy collapses, that rivals Russia and Saudi Arabia may be close to cutting back on production to prop up oil’s price. On the other hand, whether or not oil-producing countries actually follow through on that adds just one more layer of uncertainty for the market.

This week sees a few earnings and then next week will be important because the large banks will give their numbers: Tuesday – LEVI; Wednesday = DAL; Thursday – WDFC.

Economic reports will see: Tuesday – February JOLT jobs openings report; Thursday – March P.P.I., weekly jobless claims, preliminary U. of Michigan Consumer Sentiment Survey; Friday – March C.P.I.

The S&P now trades at around 15 times for 2019’s profits of $165 and unknown profit figures for 2020, as the earnings number will be lower this year due to the virus, probably around $140. These multiples have now contracted as the market has had this large comedown in such a short period of time. It is difficult to put a correct price/earnings multiple for 2020 at the present time because of the large variability in earnings predictions. For what it is worth, estimates for the first-quarter are in the negative 11-12% range.

Economic growth for 2019 came in at 2.3% for the year. The first quarter of 2020 is now expected to be lower by as much as 35% while the second quarter could be negative by as much as 30% according to the most extreme predictions. This means that the “r” word, otherwise known as “recession”, is upon us.  

Donald M. Selkin 

Chief Market Strategist 

 

Disclosures:

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds, or other instruments in the companies noted in this report.