4/3/20 – Stocks Down as Virus Fear Spreads

It’s hard to imagine saying a week that saw the Dow decline almost 3% felt reasonably calm, but it’s true. While markets continued to sell-off, we didn’t have any days where the Dow moved up/down by over 1,000 points. Over the past five weeks, each week saw at least two days where the Dow was up/down more than 1,000 points. Every day of the week of March 9th moved by over 1,000 points. Prior to late-February a down 3% week felt terrible, now it feels like a sigh of relief. For the week, the Dow declined 2.7% while the S&P 500 decreased 2.1%. I still think we’re in a downward trend, but this week felt more orderly than anytime since mid-February.

We’ve known for several weeks that the lockdowns and protective measures put in place across large swaths of the country would hurt economic growth. We got more early data on how severe the impact will be. This week, 6.6 million initial jobless claims were filed. This is on top of 3.3 million filed last week. That’s 10 million jobs in two weeks. The March jobs report came out today and showed a loss of 701k jobs in the month. That misses a lot of the job loss late in the month and April will be a brutal month for job losses. It’s conceivable we’ll see 10mm+ job losses in April and the unemployment rate shoot past 10%. On economic growth, various wall street firms have published estimates showing the economy will contract ~30% in the 2nd quarter. The real issue is when will it rebound. Some think the 3rd quarter will see a rebound, while others believe it won’t happen until the 4th quarter. My current projections are for 4th quarter at the earliest, which will significantly hurt earnings for most major companies. It makes valuing companies in this market challenging. Stocks are valued off a multiple of future earnings and cash flow. Right now future earnings and cash flow are near impossible to project.

Over the next two weeks, companies will start reporting 1st quarter earnings and I think we’re going to see many companies pull forward earnings guidance because there’s no way to accurately assess what the future holds. I expect some companies will suspend share buybacks and cut dividend payments.  We’ve seen/heard lots of bad economic data over the last couple weeks, but hearing from companies will provide great insight to what is happening on the front lines of the economy and give us a sense for how bad this recession is going to be.

On the virus front, confirmed cases continue to grow at high rates. There are currently 270k confirmed cases in the US. This is up from 100k cases last Friday. That’s doubling approximately every 4 days, even with all these protective measures. There’s been some positive headlines on vaccine development and some potential treatments, but all of those are speculative and months away, at the earliest. The key for any treatment as well is that it needs to be able to reduce or eliminate hospital stays. Decreasing the mortality rate is great for our country, but reducing the hospitalization rate is key for getting the economy started sooner.

Oil climbed sharply this week on rumors that Russia and Saudi Arabia will cut production. Oil inventories are bloated, demand is down and producer countries have to agree to cut production if they want to support the price. For the week, oil increased 32.2% to close at $28.56/barrel. The yield on the 10-year Treasury decreased to close at 0.61%, from 0.71% last week. The average rate on a 30-yr fixed rate mortgage declined to 3.33% from 3.50% a week ago.

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