Art Hogan’s Market Commentary – March 30, 2020

Morning Commentary

U.S. stocks posted their best week in over 10 years, buoyed by an unprecedented stimulus package meant to blunt the economic impact of the coronavirus pandemic. Treasuries gained and oil slipped. The week ended with a late day sell off on Friday as Fridays have seen markets close lower for nine of the past ten weeks.

The S&P 500 Index climbed 10% this week, its biggest gain since March 2009, on the strength of a record three-day rally. The rally took a pause on Friday, with the benchmark sliding just minutes before the close, illustrating how fragile any gains can be, even with a $2.2 trillion spending deal heading to the president’s desk for his signature. The S&P remains 25% below its February record, and the CBOE Volatility Index is on track for a 10th straight close above 60. It averaged 18.7 in the past year. The Dow Jones Industrial Average had its best week since 1938, closing higher some 2460 points, or 12.84%. The S&P 500 added 236 points on the week, or 10.26%, while the Nasdaq was better 622 handles, or 9% when they rang the closing bell to end the week.

 

 

Treasuries gained after the Federal Reserve said it would reduce the pace of its purchases next week. That announcement may have contributed to the stock market’s late-day swoon, or more likely we continue to view Friday afternoons as the time to take profits.

Investors had piled back into the battered U.S. equity market last week on speculation that the massive relief bill would offset some of the pandemic’s impact on businesses and households. A debate has ensued over whether that furious rally represented unwarranted optimism or the start of a long-term bottoming process.

What remains clear is that the virus has ground the American economy to a near total halt, with new jobless claims spiking above 3 million as large areas of the country remain virtually locked down to slow the spread of the infection. A measure of U.S. consumer confidence fell the most since 2008. West Texas crude declined, setting up a fifth straight week of losses.

 

 

The biggest driver of the Mid-Week-rally, away from stocks being extremely over sold, was the passage of a massive fiscal stimulus plan. The historic $2.2 trillion rescue plan to respond to the economic and health crisis caused by the coronavirus pandemic.

The package includes an unprecedented injection of loans, tax breaks and direct payments for major corporations and individual taxpayers to help the U.S. economy get through an abrupt shutdown as people avoid social interaction and businesses close to keep from spreading the coronavirus. More than 143,000 people in the U.S. have been infected with the deadly respiratory disease, and some economists warn that unemployment could hit 30% in the second quarter.

The success of a massive stimulus package will depend on how quickly the aid can get to beleaguered consumers and businesses — a huge challenge for federal and state agencies that aren’t built to move quickly.

With the new fiscal policy in place, coupled with ultra-aggressive monetary policy at the Fed, investors will be better able to face the tsunami of negative news that awaits us on the short term horizon. The new case discovery in the US is exploding, doubling every three days, as we are just now getting around to testing people in large numbers. The thrust of the government policies is directed to ameliorating the economic and financial damage from the pandemic, the virus makes the timeline.

The economic data will be horrendous for a spell as well as we have virtually shut down the economy to help stop the spread of the virus. The first punch to the solar plexus come last week with the US Jobless claims. Filings for unemployment benefits are skyrocketing — so much so that state filing systems have been crashing under the excessive volume of applicants.

The real labor-market action will come on Thursday, not Friday, this coming week.

The March jobs report is due to break a streak of 113 consecutive months of payroll gains. If by some chance March does not end this trend, April undoubtedly will. Due to measurement technicalities around how payrolls are counted, the March jobs report might not be too shocking. Here’s why:

Workers need to be unemployed for the entire pay period containing the 12th of the month to be counted as a lost payroll. As a result, workers who are paid bi-weekly, semi-monthly or monthly and managed to work just a short period at the start of the month will still be considered employed in the nonfarm payroll count. The same would also apply to workers paid on a weekly basis who got paid for even just one hour on March 8th or 9th.

Because of this issue, the March jobs report will vastly understate the extent of labor dislocation occurring as a result of the economic “hard-stop” resulting from containments efforts of the Covid-19 crisis. Instead, the more important information regarding the speed of labor market deterioration will be the weekly data on filings for unemployment benefits, a.k.a initial jobless claims.

Jobless claims spiked the most on record last week, rising by 3.3 million. The trajectory over the next few weeks will shed considerable insight toward the magnitude of increase in unemployment which could occur throughout the second quarter. State unemployment filing systems have been overwhelmed by the sheer volume of applicants, so it is entirely possible that the initial jobless claims tsunami may not have even crested yet.

Last week’s claims filings alone suggest the unemployment rate is due to move toward 5.5% in April from 3.5% in February. Bloomberg Economics’ preliminary forecast for second-quarter unemployment is 6.5%, but if a million-plus claims results persist for a few more weeks, the risks will be tilted toward much higher unemployment.

In these exceptional economic circumstances, weekly jobless claims deserve top billing over the monthly employment report.

Unless and until we see the number of new case reports hit a peak, like they have in both China and South Korea, we are likely to stay in the roller-coaster like volatile market environment. We will get there and markets will recover. You can track the Coronavirus on the Johns Hopkins Website Here

All bear markets come to an end, eventually. It feels extreme now because it is. There is no easy way to quantify either the economic shutdown and what the eventual recovery is going to look like as the monetary and fiscal policy initiatives are as historic as the economic decline. The S&P 500 has already dropped nearly 34% in under a month suggesting the panic phase of selling could be nearly done based on the 14-week RSI. Such extreme oversold readings have tended to happen as the heaviest of the selling was largely behind us. 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 CDC Guidlines Don’t panic, Rebalance; talk to your Financial Advisor; Stick to your Strategy; and if this type of market volatility has you up at night, Recalibrate your Equity Exposure to match your Risk Tolerance

 

Other News:

Easter Parade Canceled – President Donald Trump abruptly abandoned his ambition to return American life to normal by Easter, heeding advice from the government’s top doctors that re-opening the U.S. economy in two weeks’ risks greater death as the coronavirus outbreak accelerates. In a stark shift from two weeks of measured optimism, the president said his guidelines for Americans to practice “social distancing” would remain in place until at least April 30, and he warned that 100,000 or more people may die. He said in a Rose Garden news conference that he hoped the country would reach “the bottom of the hill” by June 1 — “could even be sooner, could be a little bit later.”

 

Testing faster – Abbott Laboratories shares surged in U.S. pre-market trading after the company unveiled a coronavirus test that can tell if someone is infected in as little as five minutes, and is so small and portable it can be used in almost any health-care setting. The stock jumped 17% to $87 at 4:38 a.m. in New York. The shares had fallen 14% year to date through Friday. The medical-device maker plans to supply 50,000 tests a day starting April 1, said John Frels, vice president of research and development at Abbott Diagnostics. The molecular test looks for fragments of the coronavirus genome, which can quickly be detected when present at high levels. A thorough search to definitively rule out an infection can take up to 13 minutes, he said.

 

Not just for malaria anymore – A Drug President Donald Trump backed as a possible “game changer” in the fight against the coronavirus pandemic received an emergency-use designation from U.S. regulators. The Health and Human Services Department accepted 30 million doses of the drug, hydroxychloroquine, from Novartis AG’s Sandoz unit, Secretary Alex Azar said in a statement late Sunday. Normally used to treat malaria, hydroxychloroquine yielded promising yet inconclusive results in a small coronavirus trial. While Trump has said the drug is safe, it does carry significant side effects. Some people have been sickened, with one reported death, after taking various versions to try to ward off the new illness.

 

The Week Ahead:

Monday – European Confidence Numbers for March (5 am ET), US Pending Home Sales for February (10 am ET), and Earnings – CALM before the open.

Tuesday – German Unemployment for March (3:55 am ET), European CPI for March (5 am ET), US Case-Shiller Home Prices for January (9 am ET), US Chicago PMI for March (9:45 am ET), US Conference Board Confidence for March (10 am ET), and Earnings – BB, CAG, and MKC before the open and LNDC and VRNT after the close.

Wednesday – Eurozone Manufacturing PMIs for March (4 am ET), Eurozone Unemployment for February (5 am ET), US ADP Jobs for March (8:15 am ET), US Markit Manufacturing for March (9:45 am ET), US Manufacturing ISM for March (10 am ET), US Construction Spending for February (10 am ET), US Auto Sales for March, and Earnings – LW, and UNF before the open and PVH after the close.

Thursday – US factory orders for February (10 am ET), US Durable / Capital Goods for February (10 am ET), Analyst Meetings -GDDY, and Earnings – AYI, KMX, SCHN, and WBA before the open and CHWY, FC, NVGS, and RECN after the close.

Friday – US Jobs Report for March (8:30 am ET), US Markit Services PMI for March (9:45 am ET), the US Non-Manufacturing ISM for March (10 am ET), and Earnings – STZ before the open.

 

Upcoming Catalysts:

US CDC travel/assembly restrictions set to expire Tues 3/31.

US jobs report for Mar – Fri Apr 3.

Alaska, Hawaii, Wyoming primaries/caucuses – Sat Apr 4.

US bank stress tests due to the Fed by Apr 6.

Wisconsin primary – Tues Apr 7.

FOMC meeting minutes (from the 3/18 meeting) – Wed Apr 8.

World Bank/IMF spring meetings – Apr 13-19 in Washington.

Q1 earnings – JPM kicks off the season on Tues 4/14.

GILD coronavirus drug (Remdesivir) trial results will be made public Apr 27 in China

Connecticut, Delaware, New York, Pennsylvania, Rhode Island primaries – Tues Apr 28.

FOMC meeting – Apr 29.

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 Jul 13 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.

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