As we head into what is likely to be a particularly unique earnings season, signals out of the equity markets remain mixed. Transports are still down almost 30% from the print high and small & mid-caps continue to struggle, but Utilities and REITS have surged towards recovery and equities as a whole are coming off one of their best weeks in decades. Rallies are common in bear markets though and so far our path downward still resembles bears of previous eras, so our sympathies go out to analysts tasked with providing earnings guidance this quarter. The massive spike in new corporate debt and global unemployment—Canada just posted its worst monthly result on record—will certainly be a talking point, as will the anticipated hit to banks when those newly unemployed struggle to meet housing costs. Are the banks prepared to weather this likely surge in delinquencies? Meanwhile, the Fed's massive stimulus efforts are starting to pay off to the tune of stabilized credit markets and a shrinking high-yield spread, but it hasn't come cheap; the balance sheet shot up another ~$2.7 billion last week alone! Finally, increased coronavirus testing has revealed a growing population of asymptomatic "silent spreaders," which has us bracing for additional waves of infection. Is the economy prepared to ride them out?
1. Certain segments of the markets have a long way to go to recovery including the Transports, mid caps and small caps...
Source: The Chart Store, from 4/12/20
2. ...While other indices and segments are treating Covid-19 like a temporary blip...Which is "correct?"
Source: The Chart Store, from 4/12/20
3. Utilities and REITs lost ~41% in about a month and have recovered almost half in ~10 days...
Source: The Chart Store, from 4/12/20
4. A caution that past bear markets have had major retracements to the 50% and 62% ranges before taking another leg down. The short Bollinger confirms this rally may be overdone...
Source: The Chart Store, from 4/12/20
5. This reminds us of our Anatomy of a Bear Market piece we wrote years ago. "Those who do not learn from the past are doomed to repeat it." George Santayana
Source: WSJ Daily Shot, from 4/13/20
6. With corporate earnings estimated to lose in the double digits and unemployment estimates moving towards 25%, is this really over?
Source: WSJ Daily Shot, from 4/13/20
7. To meet payroll and to preserve cash, U.S. corporations have tapped their credit lines for almost $1/2 trillion of additional debt. Again, if some of this goes bad, are our banks able to take the hit?
Source: WSJ Daily Shot, from 4/13/20
8. During the 10+ years of the last economic expansion, ~ 25 million jobs were created. Two thirds of these have been lost in three short weeks...
Source: WSJ Daily Shot, 4/13/20
9. Unemployment is spiking across the globe...here is Canada...the worst monthly result ever...
Source: WSJ Daily Shot, 4/13/20
10. If over 15 million jobs have been lost in three weeks and predictions are easily doubling this figure, rent and mortgage payments are going to go in delinquency. Are the banks ready for a second systemic hit?
Source: WSJ Daily Shot, from 4/13/20
11. The Fed is fighting hard...They have purchased ~$2 trillion in bonds since the crisis began, ~75% in just a few weeks!
Source: The Chart Store, from 4/12/20
12. The Fed's aggressive interventions have helped stabilize the credit markets.
Source: The Chart Store, from 4/12/20
13. Even the spreads on Junk bonds have pulled back in...for now...
Source: The Chart Store, from 4/12/20
14. Has the sell-off in EM currencies and bonds been over-done?
Source: The Chart Store, from 4/12/20
15. Why EM currencies have been hit so hard...
Source: WSJ Daily Shot, from 4/13/20
16. This is the worry...All it takes is one asymptomatic person to start the pandemic all over again. It is reasonable to expect a second wave and/or re-occurrence in hot spots until a vaccine is found...
Source: WSJ Daily Shot, from 4/13/20
It's bound to be an interesting earnings season and there's sure to be no shortage of think pieces published once the numbers start rolling in. To give the figures some context, read our Q1 market commentary, “To V or Not to V” and catch up on the major events, themes, and takeaways from the quarter.
Disclosure: The charts and info-graphics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are a recommendation to take any action. Individual securities mentioned may be held in client accounts.