Plugging leaks. Stocks rallied yesterday on continued optimism about portions of the country coming back on line. An early-session rally was muted by a series of weak economic data and a Fed official warning of a slow but sure recovery, both contributing to stocks closing off their session highs.
N O T E W O R T H Y
Localization. If you look at history in the business world you would note that high level business strategies come and go, enjoying popularity in one period only to find a complete directional change in the next. A good example of this was the acquisition binge of the 70’s and 80’s which gave way to conglomerates like General Electric, SunBeam, and virtually all consumer product companies. The era the followed saw companies aggressively unwinding the massive, uncontrollable behemoths that were created in the decades prior. The new fashion became focus on core business using M&A in a more strategic and limited way within the same industry. A much larger and longer standing strategy has been globalization, which is based on the economic concept of division of labor. The theory generally shows that economies can grow faster when allocating labor activities to the workers, or regions who are the best at completing the task. The best and most obvious example is how, starting in 1980’s, the US began to rely more heavily on lower-cost labor found offshore, particularly Asia. Lower cost labor meant not only larger profits for wholesalers, but also the ability to bring more product variety at lower price points to consumers. The move seemed like a win-win where both companies and consumers could benefit. Since the 80’s, globalization expanded rapidly with supply chains spanning across multiple continents. One of the negative side-effects of the strategy is the strong interdependencies between countries. The superlative example for this interdependence is between the US and China. The US relies on China for low-cost manufacturing and China depends on the US to consume its manufactured product. Business strategies usually pivot when tested by extreme market events. In the case of the large conglomerates of the 70’s and 80’s it was the emergence of the internet, tech companies, and the focus on growth combined with a few good stock market crashes that caused corporate boards to decide to trim down in order to compete in a new era. The theme of globalization was first tested in a big way when the Trump Administration began its tariff war with China in 2018 causing a massive disruption in global trade. The disruption highlighted companies’ reliances on logistics networks that began perhaps a bit too far out. What they learned is that as long as political and social objectives were aligned, things ran smoothly and the trade war exposed how things could go wrong when agendas deviate. More recently, the Coronavirus has exposed further weaknesses in the supply chain in which the US may have become overdependent on foreign manufacturing of strategically important products. The challenge is not just in the US. In Europe, the EU is being challenged in a similar way. The Union has been under a lot of pressure in the past decade with first the Greek debt crisis followed by an Italian debt crisis (and a few others), the Syrian Refugee crisis, and now the Coronavirus crisis. This current crisis exposes a crucial weakness in the Eurozone in which monetary policy is centralized (The ECB) but fiscal policy is localized, the responsibility of the individual member countries. In the case of bailouts of weaker union nations, stronger ones can decide whether or not to extend aid. With all countries suffering an economic slowdown, different political agendas begin to become more clear. The EU’s strength will certainly be tested in the months ahead. There is already plenty of evidence suggesting that US companies have been shortening supply chain lines bringing things closer to home, so to speak. Globalization, will be further tested in the months ahead and only time will tell how it will look in the next chapter of business strategy... yet to be written.
THE MARKETS
Stocks rallied yesterday as traders expressed hopes for an economic restart. Later in the session, comments by Fed Vice Chairman Richard Clarida said that he expected that the economy would need further stimulus to get back on track. The comments contributed to selling late in the session leaving stocks higher, but off their session highs. The S&P500 climbed by +0.90%, the Dow Jones Industrial Average traded up by +0.56%, the Russell 2000 rose by +0.75%, and the NASDAQ Composite Index Advanced by +1.13%. Bonds pulled back for a third straight session and 10-year treasury yields climbed by +3 basis points to 0.66%. Crude oil jumped another +20.45% yesterday as bulls are hopeful that economic recovery will spur demand and drillers seem serious about cutting production.
NXT UP
- ADP Employment Change (April) is expected to show that -21 million private non-farm jobs were lost last month compared to -27 k in March. This is looked at as an early view into the even more closely watched employment situation from the BLS due on Friday. This will be watched closely.
- The DOE will announce US Crude Oil Inventories (May 1) which are expected to have fallen slightly to 8.667 million barrels from 8.991 million barrels in the prior week.
- Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic will both speak today.
- This morning Alexion Pharmaceuticals, CVS, KKR, New York Times, Zoetis, and Discovery Inc beat estimates, while Bunge, Clear Channel, Sally Beauty, Wendy’s, and Papa John’s missed. We will hear from Spirit AeroSystems, General Motors, and FLIR Systems before the bell and post-bell earnings announcement are expected from Zinga, T-Mobile, Fox Corp, Etsy, Twilio, Lyft, GoDaddy, Peloton, Square, Carvana, American Water Works, MetLife, Hyatt Hotels, Albemarle, Wynn Resorts, PayPal, and CenturyLink. So lots of announcements to ponder on your commute from your home office to your kitchen.