Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market. – Warren Buffett
Just when investors thought the news could not get any worse with regard to the coronavirus and the economy, the stock market rebounded to post its best weekly performance since 1974. The S&P 500 Index jumped 12% and is up 25% since its low back on March 23rd. On the bright side, there were indications that the spread of the coronavirus was slowing in New York City, the country’s epicenter for the virus, and that the apex in cases in New York state was imminent. There also were signs that the rate of growth of new Covid-19 cases had fallen throughout the country while the number of deaths in Spain and Italy were fewer. President Trump announced the formation of a second task force that would examine the best approach to reopening the economy and said that there was “light at the end of the tunnel”. While the news on the spread of the virus seemed to be improving, we are definitely not out of the woods yet as there is no proven treatment for the virus and a vaccine may be a year away. With the economy shut down, the data clearly reflect a dire situation. The minutes from the Federal Open Market Committee (FOMC) emergency meeting in March showed that all Fed officials agreed that the near-term economic outlook had deteriorated sharply in recent weeks and was deeply uncertain going forward. As a result, the Fed announced aggressive new programs last week totaling up to $2.3 trillion that included loans to small and medium-sized businesses and plans to buy investment-grade corporate bonds and even high-yield or junk bonds. Weekly jobless claims were a staggering 6.6 million, bringing the three week total to 16.8 million, and some forecasts predicted that the unemployment rate could rise to as high as 20%. The grim economic news will begin to show up in first quarter corporate earnings reports this week and the results and near-term guidance could be sobering. But those with a longer-term view should be optimistic that things will get better.
The producer price index (PPI) for March fell slightly and was better than expected but did not capture the full impact of the coronavirus on the economy. The consumer price index (CPI) fell more than expected as gasoline prices plunged and the cost of airfare and hotel rooms plummeted.
OPEC and Russia agreed to cut oil production by 10 million barrels per day in May and June and 8 million barrels per day for the rest of the year with Mexico being the only country that did not agree.
For the week, the Dow Jones Industrial Average jumped 13% to close at 23,719 while the S&P 500 Index climbed 12% to close at 2,789. The Nasdaq Composite Index rose 10.6% to close at 8,153.
Retail sales in March are forecast to decline by over 6% as the coronavirus forced the closing of retail stores nationwide and consumer spending plunged due to the spike in unemployment. March industrial production is also expected to fall significantly and March leading economic indicators is anticipated to drop by over 6%. Housing is expected to be negatively impacted as well with March housing starts forecast to decline substantially.
First quarter earnings season begins this week and will be led by the financials, including JP Morgan Chase, Wells Fargo, Bank of America, Citigroup, Charles Schwab, Goldman Sachs, BlackRock, U.S. Bancorp and PNC Financial. Other notable companies on the agenda include Johnson & Johnson, UnitedHealth Group and Abbott Labs.
It is very difficult to reconcile the fact that the S&P 500 Index rose 12% to post its best week since 1974 when it was reported the same week that 6.6 million people lost their jobs, bringing the total number to nearly 17 million in just three weeks. One possible explanation is that the market was deeply oversold and tends to look ahead and not in the rear-view mirror. Most economists believe that the U.S. economy is already in a recession and should bottom in the second quarter with the consensus forecasting a contraction of about 25% in gross domestic product (GDP). By the second half of the year, though, growth should be positive and consumers should continue to spend even though unemployment will increase to 12% in the second quarter and gradually fall to below 10% by year-end. The reasons for the optimism are the aggressive monetary and fiscal stimulus that both the Federal Reserve and the federal government have provided to stabilize the economy. Last week’s decision by the Federal Reserve to buy not only investment grade corporate bonds but select high-yield bonds as well signaled to the market that the Fed is willing to do whatever it takes to prevent the economy from falling into a depression and provide the necessary support to allow it to recover. However, the uncertainty over the economic impact of the coronavirus, its effect on corporate earnings and its duration longer-term will likely lead to continued volatility in the market. But it is important to remember that bear markets such as this one end with recessions and don’t begin with recessions. The economy will eventually recover and when it does, a new bull market in stocks will be formed.