Pressure
How much should we make of the negative action witnessed across equity markets late last week? Sure, it felt awful. Markets do that these days, in the short term. Due to the speed of what passes for modern price discovery, headline price levels for the major indices indeed tend to overshoot in both directions. That's my humble opinion. This makes assessment that much more difficult in real-time.
That said, the large-cap indices all gave back more than 2.5% on Friday, the small-caps, closer to 4%. There was clear pressure placed on Energy, as well as semiconductors, that deprived equity markets of recent leadership. Beyond the leaders, the weakness spread across many industries -- such as recreation, autos and the banks, currently suffering from forced economic contraction. Thursday's spate of selling made some sense, even on elevated trading volume, as the last day of a highly positive month should be expected to cause an inverse reaction at the headline level.
Friday is a bit trickier. Maybe first, because, taking a look at the Nasdaq Composite, readers will see not just greatly reduced trading volume on Friday, but also an "Inside Day" on Thursday.
For the new kids, what does an "Inside Day" usually signal? Continuance of trend, right? Well, going into Friday, that should have given investors some confidence. Instead, the floor fell out, and Friday met with a "gap down" opening. Does the lower trading volume mean less conviction? Sure could, but futures are weak overnight. Does the gap left open still need to fill? That would be positive, but there are reasons left open to doubt here.
First up, the gap down open was created by earnings, or what was spoken around earnings. Amazon (AMZN) willing to spend more than a quarter's worth of operating profit on maintaining conditions of safety. Apple (AAPL) simply not offering guidance, even as the firm upped payouts to shareholders and even as that firm might be more reliant than most upon the only truly functioning economy (China) in the world right now.
These issue are not being viewed as positives. Dominant firms forced to decide to forego profit "on the hop" or being truly uncertain in regards to end market demand is new, and if these firms are being put in this position, then just how tough might conditions be once investors get past the super-caps? Those in positions of dominance might withstand these conditions for now. Others? Oh, and the S&P 500 did not end up putting in that Inside Day on Thursday either.
Of Course
Of course there's more than that. According to FactSet, the S&P 500 now trades at more than 20x next twelve months earnings. Expensive? By almost any metric. Markets are forward looking? How far forward are markets supposed to look? Should we be scanning out 24 months? Can markets see a quick and easy path (or not) toward a vaccine that tackles this coronavirus that has destroyed the global economy in its tracks? Can markets see a rapidly developed "next therapeutic" that either improves upon what Gilead Sciences' (GILD) Remdesivir has accomplished, or at least works in conjunction with that medication to enhance outcome? Consumer confidence? Not until one or both of those conditions are met.
Perhaps the markets have decided that in the short term they were simply overbought, after having failed at a standard Fibonacci retracement level?
Does that make a test of the 50-day simple moving average at 2758 almost inevitable? I don't believe that anything has to happen, but that would make sense. There is more out there, a lot more that thins the ice that traders must skate upon.
Negative Forces
There are three negative forces to consider beyond the already mentioned. For one, tensions over the cause and blame for the spread of this awful virus appear to be worsening between the U.S. and China. President Trump has mentioned increasing tariffs in recent days. Secretary of State Mike Pompeo made the media rounds on Sunday, and spoke to the likelihood that the virus emerged from a lab in the Wuhan area. There are reports out there that try to explain, in less than flattering ways, what happened next.
In addition, while Berkshire Hathaway's (BRK.A) , (BRK.B) Warren Buffett did, in my opinion, try to sound confident in the ability of America to take on and defeat anything (which I agree with), I am not sure how confident he really was. Berkshire did sell its airline equity positions in their entirety during the month of April. Buffett sees that industry as perhaps fundamentally changed. He talks about index funds, instead of large investments. What does that tell us commoners? I mean when the world's most successful value investor continues to not see "anything attractive?"
I did say that there were three negative forces, didn't I? Deteriorating Sino-U.S. relations. Buffett. Oh yeah. Re-opening state economies while many of these regional economies have not even reached the apex part of the slope of transmission for this infection just yet. That's a lot of hope to place on the goodwill of good old summer heat, or on the ability of the masses to behave intelligently in public. I don't know where the balance is between economic activity and risk, but there can be no doubt that the risk is increased at this point from where it was just a few days ago.
Just for example. The "ice cream man" came down my block on Saturday. This is New York, where everyone's prayer list is now endless. I see on Facebook (FB) , that friends in other regions of the country still doubt what this virus can do, because perhaps it had not touched close as of yet (May it never). Well, even here, the appearance of the "ice cream man" on the first warm, sunny day after a lengthy spate of cold, dreary weather, turned the masses into a gaggle of babbling fools -- and it wasn't just the kids.
Clearly, I suspect that the economy gets at least some lift-off in economic activity, as there has been very little of this activity for two months. Markets will now spend two weeks trying to price in this risk without the benefit of relevant statistical data. That said, there will be data available due to increased testing, but not relevant to this re-opening.
This will perhaps skew the perception of this data, which is unfortunate. We'll need to understand the difference in what we see two weeks plus down the road from what we would have seen anyway, and that may be impossible. How that plays in the media? Politically? In the neighborhoods? I don't know.
Who Is On Your Side?
For investors, the answer is simple. You either price macroeconomic reality, which the markets did in earnest in mid to late March, or you refuse to "fight the Fed." In other words, after markets priced in a complete collapse of the U.S. and global economies, there was a general realization of just how aggressive monetary (the Federal Reserve), and fiscal (the federal government) authorities would be.
That, then, had to be priced in. There would be sustained assurance that lines of liquidity would remain open, that corporations would be able to access capital, and so could municipalities. There would be helicopter money for individuals. The government would make efforts to absorb costs here, and there and then, keep certain suddenly failing industries "in business." Efforts, troubled as they were, would be made to keep Main Street moving with Wall Street.
Still, 30 million laborers found their way toward filing claims for unemployment benefits, with millions more likely on the way, and millions beyond that either unable to, or ineligible to file. The whole trick, and it is way more than a trick, is to bridge a period of mass insolvency at every level of unknowable duration, through the expansion of the monetary base by large-scale public debt issuance at controlled expense, while creating an environment that encourages the private sector to follow suit. Does this succeed?
The moves made over the past six weeks will be studied for generations. The boldness of the moves will be seen as heroic. The moves made themselves will be picked apart. What went right will end up in books written by the key players. What went wrong will wind up written time and again by names unremembered across the blog-o-sphere. What we do know is that the level of economic function has diverged from market performance.
That's not necessarily wrong from a risk/reward perspective. Market behavior in the post financial crisis years was quite strong, though the economy itself spent nearly a decade behaving like it was still in recession. This time the contraction has been far more dramatic and far less predictable -- and best outcomes cannot be driven solely through economic creativity. This time, economics must pair with science. That is the overt risk. That is what markets do not know what to do with.
Economics (All Times Eastern)
10:00 - Factory Orders (Mar): Expecting -9.5% m/m, Last 0.0% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (TSN) (1.12)
After the Close: (AIG) (0.82), (SHAK) (-0.01), (SWKS) (1.33), (WMB) (0.26), (XPO) (0.47)
