What Recession?

What recession?  Stocks traded up yesterday on encouraging news on virus vaccine front and the possibility that tensions may be easing between the US and China.  Traders shrugged off weekly employment figures which showed that 3.2 million Americans filed first time unemployment claims last week alone.

N O T E W O R T H Y

Divorce season.  If one were to track commonly used statements in my year-to-date daily notes, surely the phrase: “these are not ordinary times” would be somewhere near the top.  I am not alone in the use of the statement as you can find it all over analyst reports and earnings releases. The economy and markets are known to throw us curveballs, which is pretty much why any bold statement made by a prognosticator is followed by a small-font, asterisked disclaimer that reads something like “past results offer no guarantees about the future” or “this time it could be different”.  Forecasting markets is no easy task and if you look at the track records of professional traders you would have to search really hard to find ones that have actually been able to consistently beat the market more often than they have been beaten by the market.

It is no secret that the past several months is like no other in this generation.  It seems like every day I can write about a new low-water-mark achieved in either the economy or the financial markets. Yesterday, the Department of Labor announced that 3.169 million Americans filed an Initial Jobless Claim last week, more than expected, bringing the seven week total to over 33 million. While the weekly number has been decreasing, it still represents a large number of people that have been recently unemployed. Just a month ago, the IMF reported that it expected the global economy to contract by -3% for the year after a slow recovery in the second half of the year.  WHILE YOU SLEPT, the IMF Chief Economist warned that the cost of the stimulus would exceed the agency's previous estimates, warning of a downward revision. Over in the UK, the Bank of England expects their economy to contract by -7.8% for the year… the worst since 1706.  Didn’t see that one coming.  Today we will hear from the Bureau of Labor Statistics as it delivers its monthly Employment Situation.  Economists expect that the report will show a loss of -22 million Nonfarm Payrolls and an Unemployment Rate of 16%.  If the numbers come in as expected, it would be the worst on record as 20 years of job creation were wiped out in 1 month.  You’re probably not surprised at this point.  In the corporate world, earnings are dismal as earnings growth is quashed and forward guidance has all but been removed. Neiman Marcus, the 112-year-old department store became the latest casualty of the pandemic as it filed for bankruptcy protection yesterday.  Analysts expect more to follow and the list of fallen angel debt is growing day by day. None of this should be surprising considering the global healthcare crisis that emerged in recent months.  What might be surprising is that the Nasdaq Composite Index closed in the green for 2020.  It’s true, despite all of the rough news about the economy and the corporate world (never mind the horrible death toll), the Nasdaq is up by +0.08% year to date.  This highlights the market’s complete divorce from the fundamentals that have been the bedrock of financial analysis since at least Graham and Dodd released their iconic Security Analysis book in 1934.

That’s not the only notable divorce.  Equity markets and bond markets have a rocky relationship but they always seem to end up in a good place.  When things are going well, bond prices go down when stock prices go up and vice versa.  That basic relationship holds until bond holders and stock holders disagree about the state of the economy.  Bond holders are less speculative and they take their cues directly from the economy and the Federal Reserve.  Stocks are subject to more rampant speculation with an increasing amount of home-based day traders competing with sophisticated institutional algorithmic traders.  In recent weeks as the stock market roared back from the depths of its late March selloff, bonds sat back, indicating that bond holders are not as optimistic about economic conditions as stock holders.  In fact, they are really pessimistic. An indicator of that can be found in Fed Funds Futures.  In that market, investors attempt to predict where Fed Funds will be in the… future.  Yesterday the contracts for January 2021 traded up over 100, which means negative rates!  This, despite the Fed Chairman and Fed Governors’ repeated claims that negative rates are not under consideration.  Do bond holders know something that stock holders and even the Fed Chair himself doesn’t know? Unfortunately it is still too early to tell which side is in the right.  What we do know is that, in a divorce, all parties usually lose.

THE MARKETS

Stocks traded up yesterday as investors became hopeful that tensions between the US and China would ease up.  More and more pharmaceutical companies are announcing encouraging results in the quest for therapies, which was also encouraging to investors.  The S&P500 climbed by +1.15%, the Dow Jones Industrial Average traded up by +0.89%, the Russell 2000 rose by +1.58%, and the Nasdaq Composite Index jumped by +1.41% into positive territory for the year.  Bonds rose and 10-year treasury yields fell by -3 basis points to 0.61%.  Jan 21 Fed Funds futures closed at 100.015 yesterday, indicating negative interest rates.

NXT UP

- Nonfarm Payrolls (April) are expected to have fallen by -2.2 million compared to March’s loss of -701k jobs.

- The Unemployment Rate (April) is expected to have reached 16.0% compare to last month’s 4.4%.

- Baker Hughes US Rig Count (May 8) may have decreased to 387.33 from last week’s 408 rigs. For reference, this number was 990 a year ago.

- Lots more earnings next week along with inflation numbers, Retail Sales, JOLTS Job Openings, Industrial Production, and preliminary University of Michigan Sentiment.  Check back on Monday for details and weekly calendars.

daily chartbook 2020-05-08 -1