Bob’s Journal for 4/16/20

Market-Related Events Grabbed My Attention This Week

Markets seem to be faster-moving and more volatile than ever.

Unlike in most crises, the volatility has been moving in both directions. From the peak on Feb. 19 through the bottom on March 23, the average stock in the S&P 500 declined 39%, but since, that pivotal date has soared 29.5%, according to Bespoke Investment Group.

Over a three-week period, the S&P 500 had two weeks with gains greater than 10%. That hasn’t happened since the 1930s. The index also gained 27.2% in 15 days, the best gain in nine decades. Only six other times has the index appreciated more than 20% in three weeks.

The gains don’t offset the losses, however, because an investment needs to appreciate a multiple of its decline to recover to its previous high. At this point, despite the impressive bounce off the bottom, the average stock still shows a loss of 22% from Feb. 19.

In general, the stocks that declined the most when indexes were falling also increased the most in the rally.

How Long Will the Recovery Take?

At the start of the pandemic, many people were forecasting the economy would bounce back quickly after the forced shutdowns and stay-at-home orders ended. Many talked of “L-shaped” or “V-shaped” recoveries.

A lot of that optimism is fading. A survey of American chief financial officers (CFOs) by accounting firm PwC found a sharp change in the CFOs’ views in only a month.

In a March 11 survey, 66% of CFOs said it would take less than a month for them to return to business as usual. In an April 8 poll, only 22% agreed with that view. It will take one to six months to return to normal, according to 61% of CFOs.

In the earlier poll, most CFOs believed their companies would get through the pandemic without layoffs. Now, 26% anticipate layoffs, and the percentage seems to increase with each day the isolation measures continue.

Now, 81% of CFOs expect a decrease in revenue or profits for the year. That’s sharply higher than the previous survey when CFOs assumed a sharp recovery would make up for previously lost revenue. Cost reduction is the focus of 82% of the CFOS, compared to 58% in the previous survey.

About two-thirds of the CFOs said they are looking at deferring or canceling investments. After that, they’re most likely to look at furloughing employees.

The survey makes clear that business leaders realize containing the virus will take longer than initially believed and that the containment measures are having more widespread effects as they ripple through the economy.

Businesses Borrow to Replace Revenue

Bank lending increased dramatically in the last month.

Data from the Federal Reserve show that in the last four weeks bank lending increased by more than 5%, the highest monthly gain since at least 1973.

Commercial and industrial lending increased the most, rising by 20% in four weeks. That dwarfs all previous four-week increases.

Unfortunately, the loans aren’t being used to invest and expand the businesses. Instead, businesses are drawing on lines of credit to replace lost revenue so they can meet payroll and pay other expenses.

What the Charts Say

Technical market indicators can give a good reading of whether stocks are in a bull market or bear market. Currently, the technical indicators aren’t very positive.

I often look at where an index level is now compared to a moving average.

The S&P 500 still is 4% below its 50-day moving average and 7.5% below its 200-day moving average.

The Nasdaq Composite is doing better. It is only 3.5% below both its 50-day and 200-day moving averages.

Small-company stocks, as measured by the Russell 2000 index, had the strongest bounce from the March 23 lows. But the index still is 10% below its 50-day moving average and 18% below the 200-day moving average.

Other indicators also aren’t positive. Both the S&P 500 and Nasdaq are about halfway between their 52-week highs and 52-week lows. The Russell 2000 is well below its 52-week high.

The Nasdaq is the only one of the indexes with a gain for the year to date (3%).

I suspect the recent rally won’t be sustained. Current market prices seem to reflect a best-case scenario, and the data are coming in worse than analysts expected.

The Data

We’re receiving more data reports that include the economic shutdown, and they are coming in worse than analysts expected.

The good news about new unemployment claims is that they were less than each of the two previous weeks. The bad news is that 5.5 million new claims in one week is the third highest on record, exceeded only by the two previous weeks. About 22 million total new claims were filed in the last four weeks. The previous record for four weeks of claims was 2.7 million in 1982.

It is no surprise that inflation is declining. The Consumer Price Index (CPI) for March was down 0.4% from February. It is up 1.5% over 12 months.

A lot of the recent decline was due to tumbling energy prices. Excluding food and energy, the CPI is down 0.1% for March and is up 2.1% over 12 months.

Retail sales sank 8.7% in March. That’s the largest monthly decline for retail sales since 1992 when the data were first compiled. Sales declined 6.2% over 12 months.

The details of the report reveal how consumer behavior has changed in the last month.

Sales at food and beverage stores jumped 25.6% for the month. General merchandise sales increased 6.40%. Each of those is the highest monthly gain for those categories since 1992.

Gas station sales declined 17.15%, the worst monthly decline on record. Most other categories had their highest monthly declines since 1992. Clothing sales slid 50.5%. Furniture fell 26.7%, and sales at bars and restaurants declined 26.5%.

The Empire State Manufacturing Survey was even worse. The index was reported at negative 78.2, which is the worst reading for that index by a long shot. The reading is about two times worse than forecasts and than during the financial crisis. Only about 7% of manufacturers surveyed said business improved for them in the last month.

The Philadelphia Fed Business Outlook Survey was similar. Expectations were for the index to be reported as negative 32. Instead, the index was negative 56.6.

Industrial Production in March tumbled 5.4%, and the manufacturing component declined 6.3%. Capacity utilization declined to 72.7% from 77.0%.

Homebuilder confidence disappeared in April, according to the Housing Market Index from the National Association of Home Builders (NAHB). The index plunged to 30, compared to 72 in March. That’s the biggest monthly drop by far in the 35-year history of the index and the first negative reading since June 2012. The index was between 10 and 20 during the financial crisis.

Housing starts declined by 22.3 in March, explaining the decline in homebuilder confidence. They’re still up 1.4% over 12 months. Single-family home starts declined 17.5% in March. Building permits in March declined 6.8% and increased 5.0% over 12 months.

The Markets

The S&P 500 rose 1.36% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.32%. The Russell 2000 declined 0.23%. The All-Country World Index (excluding U.S. stocks) fell 0.13%. Emerging market equities lost 0.56%.

Long-term treasuries rose 1.87% for the week. Investment-grade bonds increased 3.87%. Treasury Inflation-Protected Securities (TIPS) added 1.58%. High-yield bonds gained 4.48%.

In the currency arena, the U.S. dollar fell 0.70%.

Energy-based commodities lost 7.42%. Broader-based commodities fell 2.85%. Gold rose 5.10%.

Bob’s News & Updates

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