Week 18 Sitrep

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Most of the major U.S. stock indexes fell moderately last week as investors digested first-quarter earnings reports and the plunge in oil prices.  The Dow Jones Industrial Average gave up 467 points to finish the week at 23,775, a decline of -1.9%.  The technology-heavy NASDAQ Composite gave up just -0.2% finishing at 8,635.  By market cap, the large cap S&P 500 declined -1.3%, while the mid cap S&P 400 fell -0.7%.  The small cap Russell 2000 went the other way, finishing the week in the green, up 0.3%.1 We continue to recommend caution on a stock market recovery as the markets wait to hear if businesses will reopen in the coming weeks. The damage that has been done to the markets will take a few months to be understood.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/27/20

 

Last week was a crazy week for the oil markets as the price of WTI Crude dropped to -$40/barrel on Monday. The never-before-seen trip into negative pricing for oil sent many energy stocks reeling down over the first two days and then higher before the end of the week. The energy sector ended up being the best performing sector for the week. Defensive sectors like utilities and real estate ended the week with losses greater than 3%.  Large growth companies continue to be the only asset class with single-digit losses for the year. Value companies, which tend to be more defensive, are down between 20-35% in 2020.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/27/20

 

We have repeatedly stated that most economists expect the 2nd quarter economic activity to be a disaster. The Congressional Budget Office has released their estimates for GDP and unemployment for the remainder of 2020 and 2021 below. The CBO, known for being one of the more consistent and reasonable sources of outlooks for the economy, anticipates the worst quarter for GDP since the Great Depression and unemployment north of 10% into 2021. The good news is that they are expecting a rebound in GDP for the 3rd quarter of 2020, but growth will be subdued into 2021 as a result of the economic shutdown and its lingering effects on consumer demand.2

Source: Bespoke Investment Group, The Bespoke Report, 4/24/20

 

We are entering an important week for corporate earnings – nearly 35% of the S&P 500 index will announce first quarter earnings this week! We will hear results from the biggest technology companies like Microsoft and Apple, as well as the major energy companies including ExxonMobil and Chevron. As expected, we are seeing a smaller number of companies able to beat their earnings estimates – only 52% have beat earnings so far. The last time we saw such a low number was during the recession of 2000-2001.3 Importantly, the estimates being used for these calculations were reduced by analysts before earnings were announced – pretty disappointing!

Source: Bespoke Investment Group, The Bespoke Report, 4/24/20

 

Facset Insight reports that corporate earnings are expected to decline more than 15% for the first quarter. Last week saw negative earnings surprises from the financial sector bring the average down considerably. If earnings announcements were to finish at current levels, it would be the largest year-over-year decline in earnings since 2009. Five of eleven sectors are reporting negative earnings growth including energy, consumer discretionary, financials, industrials and materials.4

Source: Factset Insight, John Butters, 4/24/20

 

You would think we’ve seen everything by now, however this past week proved we were wrong. The week started with oil plunging in price for two straight days as futures contracts for May expired. Crude oil inventories rose by more than 15 million barrels, the third largest build on record. At the same time, crude imports were below 5 million barrels per day, the lowest import number since February 1992.5 Thus we can assume that the inventory build is a result of weak demand since production is obviously taking a breather.

Source: Bespoke Investment Group, The Bespoke Report, 4/24/20

 

Refining capacity continues to grow as U.S. companies reduce throughput showing the third lowest reading behind 2005 and 2008. The price of oil rebounded to finish the week, shrugging off a bearish report from the EIA. Storage capacity now becomes the largest concern as we surge past 75% of capacity in Cushing, OK. Oil is now coming in faster than it is being pumped out. Reports of more than 20 tankers anchored off southern California reinforce concerns of future storage problems.6

Source: Bespoke Investment Group, The Bespoke Report, 4/24/20

 

The number of Americans applying for first-time unemployment benefits fell by 810,000 to 4.4 million, but claims remained far above the levels from just five weeks ago.  Economists had expected a reading of 4.3 million.  The cumulative number of first-time unemployment benefits over the past five weeks has soared to 26.453 million as businesses shuttered across the country in the wake of COVID-19.  The spike in unemployment has likely pushed the jobless rate to between 15% and 20%, economists estimate.  Continuing claims, which counts the number of Americans already receiving unemployment benefits, came in at a record 15.967 million.

The housing market, a stalwart of the U.S. economy, finally caved under the pressure of social distancing and stay-at-home policies: existing home sales plunged 8.5% in March—its largest decline since November of 2015.  Economists had expected a decline of only 7.5%.  From the same time last year, home sales were still up 0.8%, but that was the slowest pace since last July.  By region, sales declined across the country, led by a double-digit decline in the West.  Despite the weaker demand, months of available supply picked up only slightly to 3.4 from 3.0 months as inventories remained tight.  Despite the drop in existing home sales, prices continued to rise, up 8.0% year-over-year.7

Source: First Trust Advisors, Brian Wesbury, 4/23/20

 

The short-term market indicator turned negative this past Tuesday after two challenging days for stocks. We saw five subsectors switch to low-demand mode causing our reading of 36 sectors and subsectors to fall to 24 in demand. We now have two of our three indicators urging caution for U.S. markets since the long-term indicator remains bullish. The market indexes continue to trade in a narrow range for the last two weeks while we await further confirmation of slower economic growth and corporate earnings results.

U.S. interest rates have stabilized with the 10-year U.S. Treasury Bond yielding 0.60%. Markets continue to wait for the potential economic reopening while anticipating how much business activity will resume. U.S. banks have announced enormous reserves for bad loans and mortgage providers await news of delinquencies. We believe it will take a few more weeks to discern if interest rates will change depending on how fast the economy can bottom and start to move up again. Most analysts are expecting a slow recovery as consumers may be reluctant to go back to their former ways.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/27/20

 

With the price of oil in the spotlight once again, it may surprise you that overall the price of gas, even when it was much higher than the current relatively low value, is still relatively cheap per gallon compared to several other consumer products.  What is the most expensive fluid that any consumer is likely to ever buy?  Printer ink – and it is not even close.8  No wonder they seem to practically give away the darn printers themselves!

Source: First Trust Advisors, 4/24/20

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to cameron.malott@engravewealth.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. J.P. Morgan Asset Management, Weekly Market Recap, 4/27/20
2. Bespoke Investment Group, The Bespoke Report, 4/24/20
3. Bespoke Investment Group, The Bespoke Report, 4/24/20
4. Factset Insight, John Butters, 4/24/20
5. Bespoke Investment Group, The Bespoke Report, 4/24/20
6. Bespoke Investment Group, The Bespoke Report, 4/24/20
7. First Trust Economics Blog, Brian Wesbury, 4/23/20
8. Bespoke Investment Group, The Bespoke Report, 4/24/20

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