Before The Bell
It was a game of tug of war between the bulls and the bears on Wall Street last week, with the major equity indexes seesawing back and forth in another highly volatile five-day stretch of trading. Market participants weighed both the positives and negatives, and there were many to choose from in another busy week of news that saw the first-quarter earnings season heat up. In the end, helped by a sharp rally during Friday’s session, the bulls finished with the upper hand last week, as the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index produced respective rallies of 2.2%, 6.1%, and 3.0%. Today, though, the bears are looking to start the new week off with a big move, as another tumble in oil prices is again signaling that the global economy is in a recession (more below).
As noted, investors had to balance both the good, the bad, and the ugly last week. On the ugly side was the continued global health crisis, as reports about the deadly coronavirus dominated the newswires. Meantime, the bad included dour earnings news from Corporate America and some of the worst economic data seen in decades. The news from the business beat made for awful reading. Among the lowlights were a tumble in retail sales, the worst industrial production data since 1946, another five-plus million initial weekly unemployment claims (the four-week total has surpassed 22 million applicants), and a rapid deterioration in confidence among homebuilders, which was reflected in the National Association of Home Builders sentiment Index and a 22% drop in housing starts in March. Even more depressing is that these figures will likely get worse this month, as a large portion of the U.S. economy is shut down to battle the coronavirus pandemic. The distressing economic data were accompanied by mostly disappointing earnings news from the corporate world. That said…
Wall Street was able to overlook the aforementioned depressing economic and earnings news, emboldened by reports that the federal government and some states appear to be ready to begin a partial reopening of the U.S. economy in states that have not been hit hard by the COVID-19 pandemic. President Trump unveiled his three-phase plan for reopening the economy late last week That news, along with data showing a flattening of the hospital admissions curve in coronavirus hotspots, including New York and New Jersey, and some late-breaking reports on Friday afternoon that some progress is being made on finding and/or developing a medication to fight the coronavirus, gave a boost to equities to end the volatile week. Investors also should note that the equity market has gotten enormous support from the unprecedented amount of monetary and fiscal stimulus measures put in place since the early days of March.
So what is in store for market participants this week? To start, investors remain quite worried about how severe of an impact the coronavirus pandemic has had on commerce, and travel. On point, crude prices fell nearly 40% earlier today, to a level not seen in 21 years. The oversupply and lack of demand for oil both here and abroad is a clear sign that the U.S. and world economies are in a deep recession. The fallout, which may include forthcoming bankruptcies in the energy sector, has unnerved investors. This comes ahead of a heavy slate of corporate earnings news this week that is not likely to provide many uplifting stories for the investment community. On the business beat, the housing market will be front and center, with reports due on both new and existing home sales. That data will likely show that activity has ground to a halt in recent weeks, and during the all-important spring selling season. Our sense is that the homebuilding stocks will be a difficult investment play this week following what will likely be some dour housing statistics, ones not seen in years.
Likewise, it may be another tough week for the retailers, as we will receive another report on consumer sentiment on Friday. Our recommendation is for those looking for bargains in the retailing sector, and there has been no shortage of them lately, as retailing stocks tumbled on the coronavirus pandemic, should look at the industry leaders, like Amazon.com (AMZN), Walmart (WMT), Target (TGT), and Home Depot (HD), and some of the more well-capitalized smaller players that have the financial ability to weather the near-term storm. Investors should note that our review of the retailing sectors in Issue 11 of The Value Line Investment Survey is out this week and available today for digital subscribers at valueline.com.
Before the market’s open, the equity futures indicate that the U.S. stock market is going to start notably in the red. As noted, the tumble in oil prices is weighing on the global equity markets, as investors take it as a sign that the economic pain will be quite severe in the coming months. It is now looking like the second-quarter GDP figure will be one of the worse readings ever seen, if not the worst.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
