Art Hogan’s Market Commentary -May 4, 2020

May 4, 2020

Morning Commentary

The sloppy market action on Friday took the big three indexes basically back to where they started the week. The Dow Jones Industrials were off 622 points on Friday or 2.55%. That put the 30 company index down 0.22% for the week. The S&P 500 shed 81 handles on Friday, or 2.81%, leaving the large cap index off 0.21% for the week, while the Nasdaq gave back 284 points, or 3.20%, and wrapped up the week down 0.34%.

The latest manufacturing data was released by IHS Markit and the Institute for Supply Management on Friday and it looked as bad as imagined, with new orders, output, and employment all worse than during the trough of the global financial crisis. More alarming was the news out of China, published Thursday night, which showed the manufacturing sector struggling despite much of the country seemingly having returned to normal. Turns out that a worldwide collapse in consumer spending will do that, even if employees are able to “go back to work.”

There are also growing concerns that the U.S. will begin retaliatory measures against China, which it blames for obfuscating details about the coronavirus when it first emerged in Wuhan this past winter. U.S. President Donald Trump promised a “conclusive” report on the Chinese origins of the coronavirus outbreak, showing relations between the world’s biggest economies are set to remain rocky at least until the next election six months from now.

Trump pledged the report Sunday in a “virtual town hall” with Fox News, in which he added that he had little doubt that Beijing misled the world about the scale and risk of the disease. Earlier, Secretary of State Michael Pompeo said “enormous evidence” shows the Covid-19 outbreak began in a laboratory in the central Chinese city of Wuhan, without providing evidence to support his claims.

Meanwhile, existing U.S. programs to prevent small business failures are proving increasingly insufficient. The “paycheck protection program” has been plagued with issues, largely because there wasn’t enough money allocated to the program in the first place, leading to a scramble to fill out loan applications and many businesses missing out entirely. The time-limited nature of the program will soon become an issue, but that’s not until June.

Where do we go next, and what will that mean for markets? Investors continue to weigh a brutal economic picture against hopes for a coronavirus treatment and an eventual end to lockdown measures across the world. Earnings reports from tech giants show some parts of the economy have remained resilient. Turns out, a global lockdown is the ideal time to be dominant in fields such as cloud computing, social networks, enterprise software, video, logistics, and delivery. By helping us make the transition to WFH feel less crippling, the U.S.’ largest tech companies have managed to play offense while middling players scramble for their lives.

As of today, more than a dozen states will have started to loosen restrictions that they imposed to limit the spread of the coronavirus. Public health experts worry that reopening too soon could lead to a spike in infections that wouldn’t be detected for weeks. The re-opening of the economy will likely be a bumpy state-by-state ride. Governors will have to balance health concerns with growing demands for getting back to something that resembles normal.

The risk-off mood in markets continues this morning with most major gauges trading lower. Overnight the MSCI Asia Pacific ex-Japan Index dropped 2.6%. Japanese markets are closed for a three-day holiday. In Europe, the Stoxx 600 Index had dropped 2.6% by 5:50 a.m. Eastern Time as traders there returned from a three-day weekend. S&P 500 futures are off 25 points as of 7:15 AM, the 10-year Treasury yield was at 0.597% and gold was higher.

Other News:

No belt tightening inside the beltway – Congress turns its attention this week to negotiations over another round of economic stimulus, with battle lines drawn over more than $1 trillion in additional spending floated by Democrats amid objections from Republicans and demands from President Donald Trump. Republicans are chafing at the prospect of adding to the $2.9 trillion already allocated to pandemic relief, yet the two sides are open to some funding for the most contentious piece: aid to state and local governments. GOP’s lawmakers have eased their opposition to the Democratic-backed proposal, expressing openness to offering some relief in exchange for business liability protections. And House Speaker Nancy Pelosi has indicated at least partial agreement with Senate Majority Leader Mitch McConnell that state and local aid should be focused on the losses caused by the coronavirus pandemic.

Too much leverage drops the popped collar – J. Crew Group Inc. filed for bankruptcy, unable to revive flagging sales of its preppy clothing line amid the coronavirus pandemic and crushed by debt rooted in a long-ago leveraged buyout. The retail chain reached a deal with a majority of its lenders to convert $1.65 billion of debt into equity, J. Crew said in a statement Monday. Lenders led by Anchorage Capital Group, Blackstone Group Inc.’s GSO Capital Partners and Davidson Kempner Capital Management are providing $400 million of financing that will allow the company to maintain operations during the Chapter 11 restructuring, according to the statement. The bankruptcy filing in U.S. Bankruptcy Court in Richmond, Virginia, allows J. Crew to stay in business while cutting its borrowings. Normally that would include keeping the doors open for its J. Crew and Madewell stores, but sales at those outlets vanished when the coronavirus forced shoppers to stay home and nonessential businesses to shut.

The FED acted faster than Berkshire this time – Warren Buffett struck some of his famous deals — taking lucrative stakes in Goldman Sachs Group Inc. and General Electric Co. — by swooping in when others panicked during the last financial crisis. He’s treading more carefully this time around. With a record $137 billion of cash piled up at his Berkshire Hathaway Inc., Buffett fielded questions over the weekend from shareholders who wanted to know why he hadn’t acted as companies clamored for liquidity amid the pandemic-related shutdowns. This crisis is different, Buffett said. “We have not done anything because we don’t see anything that attractive to do,” Buffett said at his annual shareholder meeting, which was held by webcast. The deals in 2008 and 2009 weren’t done to make “a statement to the world,” he said. “They seemed intelligent things to do and markets were such that we didn’t really have much competition.” The famous investor’s reputation allowed him to serve as a lender of last resort during the 2008 financial crisis, racking up deals that generated 10% annual dividends from household-name companies. But as panic about the virus and shutdowns assaulted equities in March and even began to freeze debt markets, the Federal Reserve beat him to the punch with an unprecedented set of emergency measures.

The Week Ahead:

First-quarter earnings season continues next week as 143 S&P 500 companies report their results. The major Earnings Reports for the week include: Monday night (AIG, SWKS, and VNO); Tuesday morning (DD, ITW, SYY, and USFD); Tuesday night (ALL, ANET, ATVI, DIS, EA, KLAC, MTCH, and OXY); Wednesday morning (CVS, GM, SHOP, and ZTS); Wednesday night (FOX, H, LYFT, MET, PYPL, SQ, TMUS, and TWLO); Thursday morning (BMY, FIS, HLT, and VIAC); Thursday night (BKNG, CTSH, DBX, LYV, MCHP, and UBER); and Friday morning (KIM, LEA, SABR, SEAS, and UAA).

Investors and economists will be waiting for Jobs Friday. The Bureau of Labor Statistics is set to release April U.S. labor-market figures before the market opens Friday morning. There’s a wide range of estimates, but they all call for a massive jump in unemployment. The average of all the figures is for a decline of 21 million nonfarm payrolls, and an unemployment rate of 16%.

Other notable releases next week include the IHS Markit global manufacturing Purchasing Managers’ Index for April on Monday, the Institute for Supply Management’s Non-Manufacturing PMI and Markit U.S. Services PMI on Tuesday, and the Department of Labor’s initial jobless claims data for the week ending on May 2 on Thursday.

Monday – US Factory Orders for March (10 am ET), US Durable / Capital Goods for March (10 am ET), Earnings before the open (CNA, L, MCY, PBI, SRE, TSN, WAB, WEC, and WLK), and earnings after the close (AIG, ALSN, AXS, CAR, CBL, CHGG, CRUS, FANG, FIVN, FN, JKHY, KMT, MHK, MOS, MWA, O, RMBS, SHAK, SWKS, TBI, THC, UNM, VAR, VNO, WH, WMB, WWD, and XPO).

Tuesday – US Trade Balance for March (8:30 am ET), US Markit Services PMI for April (9:45 am ET), US Non-Manufacturing ISM for April (10 am ET), Fed speakers (Evans, Bostic, and Bullard), Earnings before the open (ADNT, ALK, AMCX, AME, AOS, APTV, ARMK, ATI, BNP Paribas, CBB, DBD, DD, EXPD, Fiat Chrysler, HelloFresh, HSIC, Hugo Boss, HWM, INCY, Infineon, Intesa Sanpaolo, IPGP, ITW, JELD, JLL, LDOS, LHX, LITE, LPX, MIC, MGP, MLM, MNK, MPC, NEM, REGN, SEE, SYY, TA, TDG, Total, TT, USFD, VPG, W, WRK, and XYL), and Earnings after the close (ACLS, AIZ, ALL, ANET, ASH, ATVI, BCO, BLKB, BYND, CAKE, CAMP, CC, CDK, CLVS, CMP, CNO, DIS, DOOR, DVA, DVN, EA, EQR, FMC, GNW, KLAC, LC, MAT, MELI, MODN, MTCH, MYGN, NBR, NLS, OXY, PAA, PINS, PKI, PLNT, PRO, PRU, RGA, RSG, SBAC, SFM, SPCE, VOYA, VRSK, WIFI, and WU).

Wednesday – US ADP Jobs Report for April (8:15 am ET), Earnings before the open (AEIS, ALXN, ASH, AXTA, BG, BMW, BWA, CARS, CDW, CVS, Dialog Semi, DISCA, EAF, EXTR, FLIR, FUN, GM, GPC, GPN, Novo Nordisk, NYT, ODP, PAG, RGEN, ROCK, SHOP, SMG, SocGen, SPR, TRMB, VRSK, WEN, WING, WM, WYND, and ZTS), and Earnings after the close (ADTN, ALB, AMP, ANGI, ANSS, APA, AVB, AWK, AZPN, CCMP, CDAY, CSGS, CTL, CXW, DDD, EPAY, EPR, EQIX, ESS, EXAS, FIT, FOX, FRT, FTNT, GDDY, GRUB, H, HUBS, IAC, IWRD, J, LNC, LYFT, MET, MRO, NUS, NUVA, PPD, PXD, PYPL, QTWO, RCII, RDN, RE, RMAX, RNG, RNR, SONO, SQ, STAY, TIVO, TMUS, TROX, TWLO, UDR, VIAV, VVV, WCN, XEC, and ZNGA).

Thursday – US Initial Weekly Claims (8:30 am ET), US Consumer Credit for March (3 pm ET), Earnings before the open (ABC, Ahold, Air France KLM, Anheuser Busch, ArcelorMittal, BCE, BDX, BHC, BMY, Bombardier, CBG, CCOI, CHH, COMM, Continental AG, CRL, DHR, DOC, DSM NV, ELAN, Electrolux, ENDP, ENR, EPC, FIS, FVRR, FWONA, GCI, GOLF, HAIN, HES, HFC, HII, HLT, IDCC, InterContinental Hotels, IT, JBLU, Linde, LSXMA, LXP, MUR, NOMD, PENN, SRCL, STWD, Telefonica, TEVA, TGNA, THRM, VG, VIAC, VIRT, WEX, and YETI), and Earnings after the close (AAOI, ADT, AGO, AIV, ALRM, ATEN, BECN, BILL, BKNG, CTSH, CWK, CWST, DBX, DOX, ENV, EQH, EVH, FISV, FLEX, FLS, FLT, GDOT, GLUU, GPRO, HLF, HST, IPHI, IRHT, LYV, MCHP, MDRX, MSI, MTD, MTG, MTW, NUAN, OLED, PFPT, PODD, POST, POWI, QLYS, QRVO, QTWO, REG, ROKU, RPD, STMP, SVMK, SYNA, TDC, TTD, UBER, VAC, WRI, YELP, and ZG).

Friday – US Jobs Report for April (8:30 am ET), US Wholesale Inventories and Trade Sales for March (10 am ET), and Earnings before the open (AXL, BCC, BLMN, BR, CATM, ING, KIM, LEA, PBF, SABR, SEAS, SHO, Siemens, SWCH, UAA, and UFS).

Upcoming Catalysts:

ECB meeting – Apr 30.

OPEC meeting – June 9-10.

G7 Leader’s Summit – June 10-12. Camp David.

Fed will publish bank stress test results by June 30.

ECB Forum on Central Banking – June 29-Jul 1 in Sintra, Portugal.

Fed will communicate its new monetary policy framework – first half of 2020.

Democratic Convention – starts August 17 in Wisconsin.

Republican Convention – starts Aug 24 in Charlotte.

Jackson Hole Conf. – likely to begin Thurs 8/27.

First US Presidential debate – Sept 29, 2020.

First (and only) VP debate – Oct 7, 2020.

Second US presidential debate – Oct 15, 2020.

Third US presidential debate – Oct 22, 2020.

US election – Tues Nov 3, 2020.

In the meantime, remember to take care of yourself and your families. We all need each other right now. Stay safe and follow CDC Guidelines for preventing Covid-19 spread.

Most Helpful Virus sites…

JHU CSSE Global Cases: http://bit.ly/39I5NTC

U of Wash Projections: https://bit.ly/2R1Zd2U

Google Coronavirus map : https://bit.ly/2xNPEOb

Kinsa App temps: https://bit.ly/3dYPTH4

Axios Peak by State: https://bit.ly/2R3LjgA

91-DIVOC : Curve visualization https://bit.ly/2UzUsQh

CDC Virus: https://bit.ly/2R2Ycb2

NYC Health : https://on.nyc.gov/2X2lzFf

What to Put in a Covid-19: Emergency Home-Care Kit

Cleveland Clinic Coronavirus Fats: Facts about COVID-19

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