Before The Bell
The volatility on Wall Street was front and center once again. After a strong rally on Tuesday, the major equity averages reversed course yesterday, retracing the prior day‘s gains and then some. The major indexes were off sharply at the start of trading yesterday, and carried much of those losses throughout the highly bearish mid-week session. At the closing bell, the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index were down 445, 123, and 63 points, respectively. The selloff was even more severe in the Russell 2000, with the small-cap average down 53 points, more than double the percentages of the aforementioned indices.
There were a confluence of factors that emboldened the bears yesterday, including a retreat in oil prices (crude fell to an 18-year low during another bearish session), a drastic drop in home builder sentiment, a mostly dour slate of corporate earnings news, and a sharp drop in two prominent economic measures (retail sales and industrial production). The drop in crude oil prices, which is primarily the result of tumbling global and domestic demand, unnerved investors as it is a strong indicator that the nation is in the midst of a deep, coronavirus-driven recession. The struggling oil market is a major concern for market pundits, as the energy sector is a notable component of the economy, and a highly leveraged sector, which could have troubling consequences for lending institutions with significant high-yield debt exposure.
Staying with the lending institutions topic, yesterday’s corporate earnings news was headlined by a number of quarterly reports from the big banks, including Dow-30 component Goldman Sachs (GS) and Bank of America (BAC). Although the earnings figures were in line with the downwardly revised expectations in recent weeks, investors were unnerved by the dour warnings from the big banks about the near-term economic and financial stress the nation faces from the ongoing coronavirus crisis. The banks have significantly increased their loan loss reserves ahead of what they think will be a difficult stretch for U.S. businesses and consumers.
The year-to-date selloff of financial stocks on the aforementioned concerns have many of the banking stocks trading at considerably reduced valuations and what most investors would consider big bargains. That said, those investors thinking of taking a stake in this industry should tread cautiously, as we expect June-quarter results for the big banks to be equally or more painfully dire. We recommend prospective investors look at the banking stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line, as these stocks of are the well-capitalized industry leaders that are best suited to weather many of the near-term operating problems, including a likely jump in loan defaults from the devastated retailing and energy industries.
The banking industry was not the only industry in the cross hairs of Wall Street yesterday. Before yesterday’s opening bell, investors received a dismal report on the industrial (U.S factories suffered their steepest one-month decline since 1946) and retailing sectors. With regard to the latter area, the advance estimates of U.S. retail and food services sales for March 2020, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $483.1 billion, a decrease of 8.7% from the previous month, and 6.2% below March 2019. Total sales for the January 2020 through March 2020 period were up 1.1%. Given that the consumer accounts for about two-thirds of the nation’s output, this was another warning sign that the nation faces a great deal of pain in the coming months, especially if a substantial part of the economy remains closed. The Federal Reserve’s Beige Book summation of economic conditions (issued at 2:00 P.M. EDT yesterday) confirmed such, noting that employment cuts were most severe in the retail, leisure, and hospitality sectors. In general, we think that only the most risk-tolerant investors should consider a stake in the industry right now. A near-term way to play the industry may be to look at the industry behemoths, such as Amazon.com (AMZN), Walmart (WMT), and The Home Depot (HD), which have performed well during the ongoing crisis.
The economic news is again in focus this morning. At 8:30 A.M. EDT, the Labor Department reported that initial weekly jobless claims rose by 5.25 million in the most recent week, bringing the four-week total to a chilling more than 22 million applicants. It is another alarming reading for an economy ravished by the coronavirus. Likewise, March housing starts fell 22%, which was forewarned by yesterday’s report of growing pessimism among the homebuilders. This month, the National Association of Home Builders sentiment index tumbled, from 71 to 30; the dividing line between optimism and pessimism is a reading of 50.
Before the opening bell, the equity futures indicate a higher—but perhaps another volatile—start for the U.S. stock market. The bulls got a bit of a boost from some reports stateside and from across the pond. On the Continent, traders greeted warmly comments from Germany’s Chancellor Angela Merkel that Europe’s largest economy will start reopening next week after spending a month in a partial lockdown. This comes after reports surfaced last evening that President Trump, following meetings this week with his top economic advisors and U.S. business leaders, will issue guidelines today to U.S. governors on how to reopen parts of the nation’s economy. Those reports, along with in-line jobless claims figures, are providing some support to equities both here and in Europe. Stay tuned. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
