Stocks add to gains despite weak bank earnings and dismal economic data

You get recessions, you get stock market declines. If you don’t understand that’s going to happen, then you are not ready and you will not do well in the markets. – Peter Lynch

The stock market added to its double-digit gains from the previous week despite grim economic data and weak first quarter earnings from the money center banks. The S&P 500 Index rose 3% while the technology-laden Nasdaq Composite Index surged 6.1% on top of a nearly 11% increase in the prior week. As expected, the weekly jobless claims were high again, totaling 5.245 million which brings the four-week total to 22 million. Retail sales in March were also dismal as they plunged 8.7% as the economy shut down. This figure was more than double the biggest one-month decline during the Great Recession in 2008 and 2009. With many stores closed, retailers face an uncertain future and April promises more pain. Led by the financials, first quarter earnings season kicked off last week and the big money center banks reported huge profit declines that were worse than expected. JP Morgan Chase added nearly $7 billion to its loan loss provision and forecast that earnings will be down significantly in 2020. Wells Fargo, Bank of America and Citigroup also reported earnings that were much weaker than anticipated. Even though OPEC finalized a deal to cut oil production through the end of the year, oil prices closed below $20 a barrel. Without sufficient demand due to the coronavirus pandemic and weak global economies, the supply of crude oil continues to grow and finding a place to store it has become problematic. About the only good news last week was the apparent improvement in the coronavirus outlook. The growth in new confirmed coronavirus cases appears to have stabilized, creating optimism that the economy could reopen sooner than first thought. New York Governor Andrew Cuomo came out and said that the worst is over for people in his state, proving that mitigation is working. There also was positive news from drug manufacturer Gilead Sciences, which touted the effectiveness of a drug called remdesivir. It has been shown to be effective in trials to treat patients with coronavirus, but more conclusive evidence is needed for widespread use.

Last Week

In addition to the bleak retail sales and jobs data last week, industrial production declined over 5% in March, the sharpest drop since 1946. The National Association of Home Builders’ monthly confidence index was equally disappointing, falling to its lowest level since 2012. The Empire State Manufacturing Survey for April also fell to a record low.

The Federal Reserve’s Beige Book merely confirmed what everyone already knew, that the economy had contracted “sharply and abrubtly”.

For the week, the Dow Jones Industrial Average rose 2.2% to close at 24,242 while the S&P 500 Index gained 3% to close at 2,874. The Nasdaq Composite Index jumped 6.1% to close at 8,650.

This Week

Both March existing home sales and new home sales are expected to drop significantly from the previous month and durable goods in March are forecast to show a substantial decline.

Among the most notable companies scheduled to report first quarter earnings this week are IBM, Netflix, Intel, Texas Instruments, Lockheed Martin, Union Pacific, Coca Cola, Procter & Gamble, Travelers, American Express, AT&T, Verizon and Eli Lilly.

Portfolio Strategy

The Federal Reserve’s decision to cut the federal funds rate to zero and the likelihood of a fairly deep recession has caused bond yields to plunge across the yield curve. The current yield on a 2-year Treasury is only 0.20% while a 5-year Treasury yields just 0.36% and a 10-year Treasury yields 0.65%. For those investors that might be underweighted in equities and looking for an above-average yield, there are three exchange-traded funds that offer substantially higher yields and the possibility of capital appreciation over time. The iShares High Dividend ETF (HDV) tracks the investment results of the Morningstar Dividend Yield Focus Index and invests in high dividend-paying U.S. equities. This fund has a current yield of 4.6%. Another solid choice for investors looking for income is the SPDR S&P Dividend ETF (SDY), which tracks the performance of the S&P High Yield Dividend Aristocrats Index. This fund invests in companies that have a policy of increasing dividends every year for at least twenty years. This fund has a current yield of 3.5%. Finally, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) tracks the performance of the S&P 500 Dividend Aristocrats Index. This fund invests in companies that have grown dividends for at least 25 consecutive years and also have strong histories of profit and growth. This fund has a current yield of 2.7%. While many companies may have to cut or suspend their dividend payments during the coronavirus pandemic, companies in these ETFs should at least be able to maintain them or even increase the payouts.