Before The Bell
The month of April was a historic one for the U.S. stock market, with the major equity averages delivering their biggest one-month gains in more than three decades. However, the bullish month ended on a cloudy note and the first trading day of new month did not bring May flowers for investors. The one-two punch of dour news on the economy, which included a sharper than expected contraction in first-quarter GDP, and mostly disappointing corporate earnings data unnerved investors over the final two trading days of last week. Meanwhile, the selling is likely to resume this morning, as investors focus on reports of escalating tensions between the United States and China over the latter country’s role in the coronavirus pandemic.
On Friday, the major equity averages started the session deep in negative territory and held those initial losses and then some to the closing bell. As noted above, the news from both the business beat and the corporate world has given investors little to cheer about, and the expectation that data on both fronts will worsen further during the second quarter, as the world battles the COVID-19 pandemic, pressured equities and again pushed investors toward safe-haven instruments. At the closing bell, the Dow Jones Industrial Average, the NASDAQ Composite, the S&P 500 Index, and the small-cap Russell 2000 were down 622, 285, 82, and 50 points, respectively. During the week’s final session, there were no places to take comfort in the equity market, with all 11 sectors finishing in the red. The energy and consumer discretionary groups were the biggest laggards, as earnings news from industry leaders disappointed investors (see below). Declining issues far outpaced advancers on both the New York Stock Exchange and the NASDAQ.
The first-quarter earnings season has provided little comfort for investors over the last fortnight. Most of the Dow-30 companies have reported disappointing results, and have warned of more near-term pain resulting from the shutdown of the world’s largest economies. The sharply reduced guidance is what seems to be unnerving investors the most, especially when Amazon.com (AMZN) is warning of the tough stretch that lies ahead for both Corporate America and Main Street. A big March-quarter earnings miss from the retailing behemoth, along with weak quarterly showings from oil giants Chevron (CVX) and Exxon Mobil (XOM), rattled Wall Street late last week. This week will bring another heavy stretch of earnings news, which may well guide trading, along with further reports on the coronavirus pandemic. Investors may want to keep a close eye on the retailing and manufacturing sectors, as trading in those groups may be driven by the latest results from Home Depot (HD), Walmart (WMT), and Raytheon Technologies (RTX). The latter report will be the first earnings announcement since Raytheon and United Technologies combined forces. We will also get the latest quarterly results from fellow Dow-30 companies Walt Disney (DIS) and Cisco Systems (CSCO).
Likewise, the investment community has not reacted well to some dreadful economic news, which included data showing that initial jobless claims, resulting from the nationwide shutdown to stop the spread of the coronavirus, topping the 30 million mark, with another three million-plus applicants filing in the latest week. Additionally, we saw a sharp retreat in consumer confidence and a terrible reading on manufacturing activity. On the industrial front, the Institute for Supply Management’s reading on manufacturing activity tumbled again in April. Specifically, the April PMI registered 41.5%, down 7.6 percentage points from the March reading of 49.1%, while the New Orders Index registered 27.1%, a decrease of 15.1 percentage points from the March tally. This is an ominous sign for a very important part of the nation’s economy, and not surprisingly it rattled investors on Friday morning. A weak manufacturing sector will also make it hard for the energy companies to regain their lost footing; oil prices are down again this morning. The economic calendar is full this week, with investors eying nonmanufacturing activity and the much-anticipated reading on April employment and unemployment. The job data will likely be dismal and may drive trading during the week’s final session.
Before the opening bell, the equity futures indicate some more selling to start the new week. Overnight, the main indexes in Japan and Hong Kong were lower (the stock markets in mainland China were closed), while the major European bourses, including France’s CAC-40 and Germany’s DAX, are deep in the red as trading moves into the second half of the session on the Continent. Clearly, the reports of growing tensions between the United States and China over the spread of the coronavirus and the possibility of the U.S. placing tariffs on the Asian nation is unnerving investors as they return to the market this week. Investors also should note that the stocks of the airliners are set to open notably lower this morning after famed investor Warren Buffett said at the Berkshire Hathaway (BRKB) virtual annual meeting this weekend that he has exited his positions in the struggling industry. 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.
