Daily Markets: Pandemic Economics Sour Market's Mood

Today's Big Picture

As lockdowns are extended around the world, and the requirements for opening them up, even to a small degree are emerging, the economic reality is starting to sink in for market participants. The European Commission's plan for lifting lockdowns is a real gut punch, as is the IMF's assertion that this will be the biggest economic crisis since the Great Depression of the 1930s, more on both of those below.

Tallying the data from several bank earnings reports this morning and factoring in JPMorgan's (JPM) one from yesterday, we have seen a massive increase for credit loss provisions during the March quarter, which suggests rather strongly the pain across the economy is expected to be large as well. While sad to say, we see those upward adjustments and quarter-end figures confirming the other coronavirus shoe (the economic reality) is set to drop in the coming weeks, even as the number of reported new virus cases continues to slow across the globe.

We see the economic reality as a hurdle that has yet to be cleared for the market, and it is one that will likely keep volatility in play as we progress through the current earning season.

By midday trading, all the major European equity indices were in the red by more that 1.5%. The major equity indices in Asia closed down for the day, with China's Shanghai Composite falling 0.6%, Hong Kong's Hang Seng feel 0.8%, Japan's Nikkei 225 dropped 0.5% and Australia's ASX 200 lost 0.4%. As we write today's note, US equity futures indicate a fall at the open of over 1%.

Oil prices have continued to fall, despite the OPEC++ agreement on production cuts after the International Energy Agency warned that the global deal to cut supply won't be enough to prevent running out of available storage within a matter of weeks.

Data Download

Coronavirus

As of this morning, there were more than 2 million confirmed coronavirus cases with nearly 130,000 deaths. The US has over 614,000 cases, about the same number of cases as Spain, Italy, France, and Germany combined and has lost over 26,000 people to COVID-19. New York has over 203,000 cases, and New Jersey nearly 69,000. There are 13 states with over 10,000 cases.

Yesterday's worldwide increase in new confirmed cases was the lowest since March 10. For the US, it was the lowest daily increase since March 31. That's on the plus side while on the negative side, the European Commission just unveiled its plan for the partial lifting of the coronavirus lockdown, and it isn't pretty. Economies won't go back to normal until there is a vaccine or a cure. EU Commission President Ursula von der Leyen's roadmap, released today, seeks to coordinate a gradual exit from the lockdown that will first require the following conditions be met before any easing:

• Infections have decreased significantly for a sustained period of time
• Hospitals have enough beds, intensive care units, medicines, and equipment
• There's large-scale capacity for testing, monitoring the spread of the virus, tracing and quarantining carriers.

Once those conditions have been met, the following principles are to be used to gradually ease up on the restrictions currently in place:

• Implement a mobile app-based system for tracking contact between people that will provide warnings if someone nearby is infected
• Social distancing measures are to be maintained
• Widespread testing is an absolute precondition for relaxing any social distancing measures
• Older and higher risk individuals are to following remain-at-home rules for longer
• Gradually lift travel and border-crossing restrictions, starting between areas with comparably low levels of risk
• Incoming travel from non-EU nations to be phased in later, depending on the situation
• Return to work must also be gradual and not all personnel should be allowed back to offices at the same time with remote working used widely and only less risky groups and sectors essential to economic activity to return initially
• Gatherings to be progressively permitted but with restrictions:
  • Schools and universities can reopen but must continue to follow social distancing measures that include staggering meal times, fewer students per classroom and continued use of e-schooling
  • Commercial activity can be phased in, but with restrictions on the numbers allowed in shops
  • Bars, cafes, and restaurants with restricted opening hours and limited numbers of customers allowed.

Clearly, this plan is as low-risk health-wise as possible while letting people leave their homes, but at what cost to the economy? What restaurants or bars will be able to survive this? How many shops? How many companies can continue to operate at low levels of productivity? We expect to see this debate intensify significantly in the weeks to come. This plan does not allow for any sort of U-shaped recovery. We need a miracle treatment tomorrow.

Please forgive us for a little editorial commentary here. The process for finding effective treatments takes time that cannot be compressed, regardless of the level of urgency, so until one or more is discovered, the world needs another solution. Clearly keeping economies in some sort of fairly intense lockdown for what is becoming quarters rather than months, is not a viable solution either.

The only thing we can do is test and test and test and test. Those who are found to have the virus must be quarantined immediately and everyone they have been in contact with identified and tested. This means the use of mobile apps and a whole lot of effort put into making tests widely available and putting in place a process for frequent testing of as much of the population as possible. The use of mobile-apps for contact tracing is clearly a concern when it comes to privacy, but this is something that can be overcome through a variety of measures that are readily implementable.

The lockdowns were necessary as we were facing a potentially cataclysmic health disaster, but they are not a viable solution for even a few quarters. Forcing something so disastrous on people will not be met with compliance. Governments that do not come up with viable solutions are likely to face a full-scale revolt of their residents who are unlikely to consent to financial ruin.

Markets

In light of the realities of reopening the economies of the world, the markets return to up, up, and more up is astounding. Yesterday the market rally reignited with the S&P 500 rising 3.1%, its 38th trading day with moves of at least 1% in 2020 - more than in all of 2019. It was another all-or-nothing day, with over 85% of the S&P 500 companies rising on the day. The Dow rose 2.4%, and the Nasdaq gained 3.9%. In the past three weeks, the S&P 500 has gained 27%, now down just 12% YTD, and the Nasdaq is essentially unchanged YTD as the world is facing an economic collapse on par with a world war.

The story is quite different for the more domestic-oriented small-cap stocks. The Russell 2000 fell over 30% in the first quarter, its worst quarterly showing in its 40-year history. That's pretty bad. Having gained nearly 19% from its lows, it remains down 25% YTD.

Yesterday WTI dropped below $21 a barrel, and gold rose to $1,727 an ounce.

Domestic Economy

In addition to the weekly Mortgage Applications Index and EIA Crude Oil inventory reports out today, investors will be focused on the March Retail Sales Report as well as the one for March Industrial Production. Given recent comments from restaurant companies, including McDonald's (MCD), Starbucks (SBUX), and Red Robin Gourmet (RRGB) as well as retailers that shut their doors during the month, March Retail Sales ex-autos is expected to fall 7%-9%. We suspect department stores will be another hard-hit category while digital shopping and grocery are widely expected to show favorable comparisons month over month. Inside the March Industrial Production Report, we will be focusing on the manufacturing facing data to be had as we look to revisit GDP expectations for the quarter.

We'd also note the $349 billion program to support small businesses from the impact of the coronavirus outbreak is likely to be exhausted by tomorrow, and the negotiations to replenish the fund are not progressing.

The US government has agreed to inject around $25 million into the airline industry to cover payroll costs as the pandemic decimates the travel industry. American Airlines (AAL) is set to receive $5.8 billion, while Delta Airlines (DAL) will get $5.4 billion. Southwest (LUV) is to get $3.2 billion. As a condition of the aid, the airlines won't be allowed to furlough staff or cut pay until the end of September. Buybacks and dividends are banned until September 2021, and executive pay is to be limited through March 2022. Other airlines participating in the program include Alaska Airlines (ALK), JetBlue Airlines (JBLU), and United Airlines (UAL).

International Economy

The International Monetary Fund (IMF) estimates that the pandemic could cause a $9 trillion decline in global economic activity over 2020 and 2021 with a 3% contraction in the global economy this year alone. In January, the forecast for was 3.3% growth. This would be the worst financial crisis since the Great Depression in the 1930s.

The April IEA Oil Market Report (OMR) sees demand falling by a record 9.3 million barrels per day YoY in 2020 with demand for crude dropping by 29 million barrels a day in April.

Stocks to Watch

Bank of America (BAC) reported mixed quarterly results that included better than expected revenue but bottom-line results that missed consensus expectations as the bank added $3.6 billion to its credit loss provision to contend with the expected fall out and potential bad loans associated with the deteriorating economic outlook associated with the current pandemic.

Similar to Bank of America, both US Bancorp (USB) and PNC Financial Services (PNC) also reported better than expected top-line results for the March quarter but missed consensus expectations on their respective bottom lines. Weighing on those bottom-line results were increased credit loss provisions, which climbed between $600-$700 million sequentially at both US Bancorp and PNC.

Shares of Goldman Sachs (GS) are trading off following the company's March quarter results that mimicked the above financial companies - a top-line beat but a miss on Goldman's bottom line. Exiting the March quarter, Goldman's allowance for credit losses totaled $3.2 billion, with its provision for credit losses rising to $937 million up from $336 million exiting 2019. Per the company that increase "was primarily due to significantly higher provisions related to corporate loans as a result of continued pressure in the energy sector and the impact of COVID-19 on the broader economic environment."

Shares of United Health (UNH) are trading higher following the company's better than expected quarterly EPS of $3.72 vs. the $3.65 consensus. The company reaffirmed its 2020 EPS forecast of $16.25-$16.55 vs. the $16.22 consensus.

Semiconductor capital equipment company ASML (ASML) reported quarterly results that included inline revenue and EPS that narrowly missed expectations. Despite the following comment - "The demand outlook is currently unchanged, and we have not encountered any pushouts or cancellations this year. Despite the challenging circumstances, to date we have been able to continue ASML's operations. Our order intake is strong." - ASML rescinded its guidance for the balance of 2020.

Changyou (CYOU) is to be acquired by Sohu (SOHU) effective April 17, with Changyou being the surviving entity. Each Class A ordinary share of CYOU will be canceled in exchange for the right to receive $5.40 in cash.

Teladoc (TDOC) issued upside guidance for its March quarter and is now providing more than 20,000 virtual medical visits per day in the US, up more than 100% compared to early March.

Red Robin Gourmet announced it will temporarily close 35 restaurants, which are primarily mall-based locations, and shared its comps in the last four weeks fell between 63%-73%.

And file this under "not really a surprise," it's being reported that beleaguered department store chain JC Penney (JCP) is exploring filing for bankruptcy protection.

Report after today's market close is Bed Bath & Beyond (BBBY), and readers looking to get the lowdown on the reports coming later this week and in the coming one should visit Nasdaq's earnings calendar page.

On the Horizon

• Dates to mark:
  • April 17: Options Expiration
  • April 20: Prior to the market open, DexCom (DXCM) will become a component of the NASDAQ-100 Index, the NASDAQ-100 Equal Weighted Index, and the NASDAQ-100 Ex-Tech Sector Index
  • April 24: University of Michigan Consumer Sentiment report
  • April 28: Wholesale and Retail Inventories
  • April 28-29: Federal Reserve FOMC meeting
  • April 29: Q1 GDP (first estimate)
  • April 30: European Central Bank rate decision
  • May 1: Vehicle Sales
  • May 12-14: Google I/O Developer Conference
  • May 25: US stock market closed for Memorial Day

Thought for the Day

"A beautiful face will age, and perfect body will change, but a beautiful soul will always be a beautiful soul." ~ Unknown

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Coronavirus Stocks Earnings Economy