U.S. equity markets took a pause in their recent rally and slid lower last week as they were weighed down by Monday’s historic collapse in oil prices in addition to the bleak picture painted by economic and corporate earnings data. For the week, the S&P 500 lost -1.3%, while the Dow and Nasdaq Composite fell -1.9% and -0.2%, respectively. Despite the slight pull back, equities have bounced back sharply off of their lows, with the S&P 500 up 27% off its March 23rd low, reducing its year-to-date loss to -11.7% as of Friday’s close. Several U.S. states and countries around the world continue to progress toward gradual, targeted reopening of their economies, which has provided a boost to sentiment across financial markets, in addition to the stimulus efforts of the government and Federal Reserve. Most recently, the federal government’s small business rescue-loan program reopened for business on Monday after Congress added $310 billion to the fund, though those funds are expected to be exhausted quickly like those of the first round.
With about 25% of S&P 500 companies having reported first quarter earnings, results have not impressed so far with reported earnings for the quarter having fallen -21.5% over the first quarter of last year and expected to be down over -16% when all is said and done, according to FactSet. Earnings forecasts for 2020 as a whole continue to be revised lower, with the consensus currently sitting at -17%, though uncertainty around this forecast is higher than usual as more and more companies pull earnings guidance given the unprecedented conditions from the economic shutdowns. As of Friday, 20 S&P 500 companies have suspended their dividends this year and another 11 have announced decreases due to Covid-19.
On the economic front, the surge in unemployment claims continued to garner the most attention last week as initial jobless claims came in at 4.4 million, bringing the total increase in jobless claims to over 26 million in the past 5 weeks alone. In addition to monitoring the volume of initial unemployment claims, our investment team will be watching continuing jobless claims, which currently sit at about 16 million, as the peak in continuing claims has often coincided with the bottom of economic recessions historically because it indicates more people are finding jobs than are being laid off.
The week ahead has several potential market moving announcements on the docket, including the first preliminary release of first quarter GDP results on Wednesday, which the consensus forecast expects to be down about -4.0% over the prior quarter. Additionally, this week will serve as a particularly important barometer for corporate earnings with some of the largest technology companies set to report first quarter results, and it will be topped off with the monthly Federal Reserve meeting in which Chairman Jerome Powell will provide an update on the economic outlook and any further monetary policy response actions to be taken.
There continues to be a stark contrast and a daily battle between the bleak fundamental picture provided by earnings and economic data and the optimistic sentiment toward a quick and successful reopening of the economy plus the boost from significant injections of liquidity from the Federal Reserve. Despite the initial progress toward reopening, the potential for a slow, uneven economic recovery remains high, and improved liquidity, while important, does not address longer-term solvency risk for over-leveraged companies nor does it replace consumer demand. We will continue to monitor and balance incoming data from both perspectives and keep you apprised of our thoughts.
