... and cauldron bubble?" What hath Wednesday wrought? A love potion like no other perhaps, brewed up for the masses by the witches three. Let's see, what happens coming off a "down day" (That we decided was really more rotation than distribution, if you'll recall)? if one mixes a scattering of really quite positive (relative to expectations) quarterly earnings releases with a nice-sized pinch of optimistic news regarding the treatment of those afflicted with this terrible virus, and then coat the entire creation with a generous portion of overt monetary support provided by your local central banker. Hmm...
Now what did this potent mixture leave investors on Wednesday? Oh, the joy was real. For the "blue chip" Dow Jones Industrial Average scored an increase of but 2.2%, badly underperforming the broader marketplace, if that gives the reader an idea. Defensive sectors lined up at the bottom of the day's performance tables as the S&P 500 was led higher by the Communications sector, which was led from within by Internet names, and an Information Technology sector that enjoyed nearly equal help from both the semiconductor (despite Advanced Micro Devices (AMD) , a firm that really did have a nice quarter) and software industries.
Of course, all market participants read with some optimism the two press releases that Gilead Sciences (GILD) had posted prior to the market's open, and realized that there was at least hope. Hope that science could perhaps target and defeat the Covid-19 scourge. This view was supported by Dr. Anthony Fauci, a key member of President Trump's Coronavirus Task Force. The end of a nightmare? No. Sunset, after a long cold period of darkness? Maybe. A positive. Socially. Economically. Far better than bad news.
Positive takeaways? As always, I look at trading volumes, and the level of transaction increased significantly on Wednesday from Tuesday. Risk was indeed back "on." The catch? There are two. One, today (Thursday) is the last day of April. Though the final day of the month does not bear the impact of, say, the last day of a quarter, there will still be some reallocation, and April has been a home run for most equity investors. There will be at least some repositioning, but perhaps not what we would see in more "normal" times.
The second would be the Energy sector. Now oil prices have climbed up off the canvas, more on kind words than available storage. The sector has led the way of late, up 7% on Wednesday, up 16% over a week's time and up an incredible 37% for the month. Not only would the algorithms that make these decisions have enough reason to turn on the sector on this day, but now we know that former Sarge fave Royal Dutch Shell (RDS.A) has not only missed expectations for quarter revenues but has also slashed the firm's legendary dividend (first time since WW 2) by two thirds after already having put a halt to the firm's share repurchase program.
Though one can never truly tell when one writes through the zero-dark hours, this should deprive equity markets on Thursday of what has been recent leadership. That leaves the small-caps that have been on an epic tear. If the Russell 2000 was not impressive enough on Wednesday, tacking on 4.8%, the S&P 600 ran 5.5%. All hail the small-caps. Just spectacular what the perception of available liquidity, or lack thereof, can do to an asset class.
What To Make Of Q1 GDP
Obviously, a quarter-over-quarter, annualized and seasonally adjusted print of -4.8% for economic "growth" is awful. Actually, it is the nastiest such print since late 2008. Obviously, it was somewhat priced in ahead of time by financial markets. Just as obviously, it is far better than what is to be expected for the current quarter. We all know that the economy was still in pretty decent shape more than two months into 2020, and that as bad as March was, April was the month that the wheels came off.
There is no one left, outside of the most optimistic, who see a V-shaped recovery. Some still hold out hope for a more gradual version, kind of a forward sloping, lopsided U-shape. I still think Dartmouth economist David "Danny" Blanchflower put it best last week, with his "reverse square root symbol-shaped" recovery. Many believe that the demand shock that hit nearly every corner of the economy actually bottomed in mid-April.
You have all seen the numbers for various components in economic performance. No household consumption beyond essentials. No CapEx. No demand for services, nor durable goods for that matter. The rolls of those having filed for unemployment benefits in time to be included in this morning's Initial Jobless Claims are expected to have grown by another 3M to 4M individuals, bringing a six-week total to something in the area of 30M.
It stands to reason that as some states reopen very carefully, the velocity of transaction will show some immediate improvement, and will mimic the very start of that V-shape some still hope for. At some point, let's call it half way up, that ascent starts to move more sideways than upward, as there will just be fewer individuals doing business, and fewer individuals somehow managing to service higher levels of existing debt.
That is where the hiccups will happen. A resurgence of the transmission of infection has to be anticipated. Increased assistance will be required from both monetary and fiscal authorities. The help will be, in all likelihood, hampered by political influence as the national election draws near. Unless the virus causes increased desperation, which is worse.
This is not alarmist. This is meant to be pragmatic. There is so much careful work to be done. Our two legislative bodies are going to have to behave like Americans. Because Americans are going to need them to be at their best. No excuses.
The word was used by Fed Chair Jerome Powell during Wednesday afternoon's FOMC press conference. From the official statement... "The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium-term." What might be considered medium-term? Almost long-term? Sounds kind of like Blanchflower's reverse square root symbol, if you ask me.
What we know is that Powell sees the necessity of continued aggression on behalf of the central bank, as well as from congress. Last week, the Fed's total balance sheet printed at $6.6 trillion. Some see that number approaching $10 trillion by year's end. Others even higher by sometime next year. The Fed will do what it has to do. To the immediate front is the Main Street Lending Program, a facility whose term sheet is yet to be issued. Expect terms to be as generous as they have to be.
As for the future of the balance sheet, many economists that I read are discussing what is known as "yield curve control" as the next phase in monetary policy. Very basically, for those unfamiliar, such policy would instead of targeting certain levels for interest rates at various maturities and trying to influence those rates through the marketplace, the target would be the slope of the curve itself. Treasury securities would then be purchased/sold so as to keep rates from behaving erratically as the entire nation tries to grow out of a condition of extreme debt at every level.
The theory would be, and I subscribe to this theory to a point, that the potential for measured growth as well as consumer level inflation can be managed in this way... as long as there remains broad public faith in the fiat currency.
--Mastercard (MA) reported what was (relatively) a solid quarter on Wednesday morning. The stock ran. Huzzah. The key take-away for me was the 40% growth in contactless transactions, globally. How much of that is temporary? How much of this has already become a permanent shift in consumer behavior?
--President Trump is reported as favoring a rapid FDA authorization of Gilead's (GILD) Remdesivir for "emergency use" for patients battling against a Covid-19 infection, as clinical testing continues. Bear in mind (and I am long the name) that the firm has already made plain its plan to offer the first 1.5M vials without any attempt to profit. That comes to a rough 250K five day treatments.
--Yes, Apple (AAPL) reports this evening. I am already out of the options positions described earlier this week on the Fox Business Network. I was not leaving those profits open to risk just to try to capture what small gain remained possible. For me, the focus this evening is on Amazon (AMZN) . Yes, I think I probably add Apple should the markets offer a steep enough discount. Amazon, for the long crowd, is where some of the most significant March-April profits are, and these may have to be managed later. We know that revenue has likely swelled. We also know that margins have likely contracted. This one could be tricky.
--Microsoft (MSFT) earnings and guidance? I see what the firm reported as pretty close to everything investors could have hoped for. The stock had already been priced for perfection, and CEO Satya Nadella has had a way with producing. Early morning market behavior is key. Still going over the numbers. Do not think I take profits just yet.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 4.427M.
08:30 - Personal Income (Mar): Expecting -1.5% m/m, Last 0.6% m/m.
08:30 - Consumer Spending (Mar): Expecting -4.6% m/m, Last 0.2% m/m.
08:30 - PCE Price Index (Mar): Expecting 1.6% y/y, Last 1.8% y/y.
08:30 - Core PCE Price Index (Mar): Expecting 1.7% y/y, Last 1.8% y/y.
09:45 - Chicago PMI (Apr): Expecting 37.9, Last 47.8.
10:30 - Natural Gas Inventories (Weekly): Last +43B cf.
The Fed (All Times Eastern)
No Public Appearances Scheduled.