Stocks edge lower in volatile week as tensions with China escalate

You can control your portfolio allocation, your own education, who you choose to listen to, what you choose to read, what evidence you choose to pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter. – Morgan Housel, economics and finance columnist

It was a tale of two markets last week as positive news about a treatment for the coronavirus, an accommodative Federal Reserve and strong earnings propelled stocks higher through Wednesday only to see those gains evaporate by Friday’s close on renewed tensions with China and disappointing earnings from technology bellwethers Apple and Amazon. The major stock averages posted modest losses but registered one of the best monthly performances in April in a long time. The S&P 500 Index was up 12.7% during the month, the biggest monthly gain since 1987 and the third largest gain since World War II. A study conducted by the National Institute of Allergy & Infectious Diseases of Gilead’s remdesivir to treat the coronavirus proved to be a success and Gilead released results of its own study that showed improvement in patients taking the drug to treat the virus. There also were several encouraging quarterly earnings reports. Alphabet (parent company of Google) reported 13% revenue growth in the first quarter, Facebook’s advertising revenue stabilized and rose 18% from the first quarter of 2019 and both Microsoft and Qualcomm beat analysts’ earnings estimates. Even electric car manufacturer Tesla surprised analysts by reporting a profit as most had forecasted another quarterly loss. The Federal Open Market Committee (FOMC) also met last week and pledged to maintain its accommodative ways until the economy reaches full employment and inflation reaches its 2% target. It kept the federal funds rate at between 0% and .25% and investors received assurances from Fed Chairman Jerome Powell that it will do everything within its power to revive the economy in the midst of the ongoing public health crisis. But the news turned decidedly negative on Thursday as weekly jobless claims totaled 3.84 million, bringing the six-week total to more than 30 million. Investors were greeted with more bad news on Friday as Amazon missed its earnings estimates and Apple, although it beat earnings expectations, reported flat revenue growth and offered no earnings guidance for the balance of the year. There also were concerns that the U.S. would retaliate against China for the coronavirus outbreak, raising fears of another trade war between the two countries. With all of the uncertainty about the economy, investors should remain cautious as the markets will likely be volatile and directionless over the near-term.

Last Week

The consumer confidence index fell to 86.9 in April, the lowest level in nearly six years and down from nearly 120 in March. The index measures consumer’s assessment of present economic conditions and their expectations about the future. Gross domestic product (GDP) shrank 4.8% in the first quarter, the biggest contraction since the financial crisis and worse than expected. Consumer spending fell nearly 8% during the quarter, a worrisome sign as this makes up about 67% of total GDP. Pending home sales also plunged in March as the housing market was hurt by the coronavirus-induced shutdown.

For the week, the Dow Jones Industrial Average dropped 0.2% to close at 23,723 while the S&P 500 Index slipped 0.2% to close at 2,830. The Nasdaq Composite Index fell 0.3% to close at 8,604.

This Week

A precursor to the government jobs report this week is the ADP National Employment Report, which is forecast to show a loss of 20 million private sector jobs for April. The April employment report scheduled to be released by the Bureau of Labor Statistics on Friday is expected to show a decline of 21 million nonfarm payrolls and the unemployment rate is expected to increase from 4.4% to 16.1%. March factory orders are forecast to fall over 10% from the previous period.

Among the most prominent companies scheduled to report quarterly earnings this week are Walt Disney, ViacomCBS, Tyson Foods, CVS Health, Bristol-Myers Squibb, DuPont, General Motors, Raytheon Technologies, Newmont, MetLife, Devon Energy, Consolidated Edison and American Electric Power.

Portfolio Strategy

One of the most famous Wall Street adages is “sell in May and go away”, which basically recommends that investors sell their equity holdings in the month of May and remain in cash or bonds for the duration of the summer and through the end of October. This adage refers to the fact that the stock market tends to underperform for the period from May through the end of October compared to the period from November through the end of April. After a brutal March that saw the S&P 500 Index plunge over 30% from its all-time high set on February 19th, the index rebounded strongly in April to post a gain of 12.7% while the Nasdaq Composite Index performed even better with a gain of 15.5%. The rise in the Nasdaq was its best performance since 2000 and its best April ever. While this adage has proved to be true over the long-term, recent history suggests that the strategy is far less reliable. In seven of the last eight years, the stock market has posted positive gains during the period from May through the end of October. Complicating matters now is the fact that we are dealing with a public health crisis that has claimed thousands of lives, put millions of people out of work and has temporarily shut down the economy. To combat the economic damage caused by the virus, the Federal Reserve has cut interest rates to zero, pumped over $1 trillion into the economy and implemented quantitative easing to provide much-needed liquidity in the financial system. These actions coupled with the economic relief packages passed by Congress that included direct cash payments to individuals, low-cost loans to small businesses and increased unemployment benefits, have been unprecedented in terms of their size and scope and have provided stock market investors with hope that the economy will eventually get back to normal. Adopting this strategy and applying it to one’s investment portfolio would essentially be a form of market timing, which is next to impossible to implement successfully and is not recommended. Instead, investors should have a longer-term perspective and a portfolio asset allocation that is consistent with their investment objective, time horizon and risk tolerance.