In like a lion out like a bear. Stocks sold off yesterday as projected Coronavirus cases caused investors to fear that the worst is yet to come. Yesterday’s selloff capped off a quarter of losses, making it the worst first quarter on record for both the Dow Jones and S&P500 indexes.
N O T E W O R T H Y
Faith - fortitude - CONFIDENCE. While many on Wall Street are debating when the stock market will bottom out and regain its formerly meteoric rise, the real economy is just beginning to reflect the results of this historic pause in activity. Affected companies are preparing for a tough two quarters by conserving cash, cutting pay, furloughing workers, and borrowing money… lots of it. Revolving credit lines with banks have been maxed, credit line expansion options have been exercised, and the global bond market has seen a record quarter of issuance (some $750 billion). The Federal Reserve has done a fantastic job at maintaining the structural integrity of the banking system, breaking many records of its own. The federal government, also a record breaker, has initiated 3 phases of stimulus worth over $2 trillion. Lawmakers are already working on a phase 4 stimulus as many experts believe that it will take far more to keep the economy on the rails… and, yes, it is on the rails despite the slowdown in activity. The economy is contracting for the first time since the Great Recession. Many of us who lived through it have not-so-fond memories of the turmoil in the markets, the job losses, the home foreclosures, and the failure of century old financial institutions. The failure of the financial system along with a flawed home lending industry is what principally caused the meltdown, both of which have long since been fixed. This current economic slowdown is not due to a disruption in the commodities markets or a failure of the financial system, but rather one that is self-imposed. In fact, commodities are not experiencing hyperinflation and the financial system is strong. It is too early to tell how long the economy will need to be paused but even the most grim estimates have virus cases peaking within the next two months and retreating by mid-summer, so let’s call it 2 quarters. Economic numbers are really important in understanding the health of the economy but it is important to understand their nuances in order to use them effectively. Many numbers that are released today reflect the economy from last quarter. A technical recession is when GDP contracts for 2 consecutive quarters. That means by the time we label a recession, we are already in one! In this case where we think that the pullback may only last 2 quarters, we may be out of the recession before we can even label it one. The best way to keep track of the economy's pulse is through PMI’s and sentiment indicators. They are more current and are the results of surveys taken from executives and everyday consumers. Which brings me to Consumer Confidence, one of my favorites. Yesterday, the Conference Board Released its survey for March. The number came in beating economists’ expectations at 120.0 compared to last month’s reading of an upward-revised 132.6. That’s a lot of words, but essentially consumers are still relatively confident, which is a good sign. During the financial crisis the same index was at 26. Breaking down the survey, 39.6% of respondents said that current business conditions are good, while only 11.4% thought that conditions were bad, and the remaining 49% assessed current conditions to normal. Looking forward six months, 66.9% believed that conditions would remain the same, 18.2% believed that business conditions would be better, and 14.9% expected conditions to be worse. The survey shows that, for now, consumers generally expect this economic crisis to pass quickly. As I say so often in my writing, confident consumers almost single handedly drive the economy. As long as confidence levels remain healthy, the economy will be able to come out of the pause with the strength we have gotten accustomed to in the past decade. Check back tomorrow and I will unpack the results of this morning's Institute of Supply Management PMI which will give us a read on business confidence. Stay confident!
THE MARKETS
Stocks sold off yesterday and portfolio managers got their final adjustments in for the quarter. As the numbers of confirmed COVID-19 cases and deaths grow, many investors found themselves checking their bullish instincts which were so prevalent last week. The S&P500 sold off by -1.6%, the Dow Jones Industrial Average fell by -1.84%, the Russell 2000 slipped by -0.45%, and the NASDAQ Composite Index lost -0.95%. Bonds slipped slightly and 10-year treasury yields fell by -6 basis points to 0.66%. Crude oil got some reprieve advancing by +1.94% on hopes that Trump and Putin will figure out a way to end the epic slide in prices.
NXT UP
- ADP Employment Change (March) is expected to show a decline of 150,000 private sector jobs compared to last month’s increase of +183k.
- Market Manufacturing PMI (March) is expected to come in at 48.0 down from February’s 49.2.
- ISM Manufacturing (March) is expected to be 44.5 compared to last month’s 50.1.
- Wards Total Vehicle Sales (March) is expected to show a decline in sales from 16.83 million to 12.0 mm.
- Boston Fed President Eric Rosengren will speak today.