U.S. equities posted strong gains last week as investor sentiment was bolstered by efforts to reopen businesses across the country with at least 30 states already having lifted some restrictions or in the process of doing so this month. For the week, the tech-heavy Nasdaq Composite index continued to lead the way with a 6.0% gain, while the S&P 500 and Dow Jones returned 3.6% and 2.7%, respectively. In addition to the continued momentum behind the large technology names, the energy sector actually posted the week’s highest gains with the S&P 500 energy companies rising 8.3% as U.S. crude oil prices surged 25% on the anticipation of growing demand as the economy reopens.
The growing rift between the stock market rally and the bleak economic picture was especially stark this past week as unemployment hit 14.7%, eclipsing the previous record rate of 10.8% for data going back to 1948, though still below the estimated 25% unemployment rate hit during the Great Depression. The reported job losses came in better than expectations of 16.0%, but the employment picture is likely worse than suggested by the headline number as a record 6.4 million Americans left the labor force and many on temporary furloughs were misclassified as “employed but absent from work.”
On the earnings front, first quarter corporate earnings season is nearly in the books with 90% of the S&P 500 having reported earnings to date. It has been a somber earnings season, to say the least, with the S&P 500 on track for a -14% drop in earnings from the year prior and a larger drop expected for the second quarter. Amid the high level of uncertainty, many companies are abandoning the time-honored tradition on Wall Street of offering guidance on their future earnings. According to FactSet, only 32 companies in the S&P 500 index have provided earnings guidance for the second quarter. Despite so many companies withdrawing guidance, hopeful investors are discounting bad news as they look beyond the near-term turmoil to the shape of the economic recovery.
As stocks search for their next catalyst to find direction, one of the major sources of support to U.S. equities over the past decade, stock buybacks, will be notably subdued in the quarters ahead as companies look to preserve cash. Coming into the crisis, U.S. companies had been buying back stock at a high clip in the first quarter, with repurchases running 13% higher than the previous quarter, according to S&P. However since the start of the pandemic, 90 companies from the S&P 500 that accounted for 29% of buyback activity in 2019 have reduced or altogether cut buyback activity in 2020, per an analysis from J.P. Morgan. Buybacks, dividends, overhead, capital expenditures, and just about every other cash outflow are now being reduced, so second-quarter earnings reports will feel much more austere.
In the week ahead, we will get a key update on consumer sentiment and retail spending that will provide insight into the health of consumer demand as businesses across the country take initial steps to reopen. Although Covid-19 statistics may not provide the full scope of the spread of the virus as testing capabilities continue to ramp up, generating new data on infections will be invaluable as lockdowns ease. Early efforts to resume economic activity with sufficient testing to monitor progress will provide a baseline to gauge the risk of resurgence in the virus as states and cities reopen shuttered businesses. Regardless, the reopening process will be uneven with lasting implications for some industries. Reopening the economy won’t turn back the pandemic clock. Therefore, our team at First Merchants will continue to take a measured approach on behalf of our clients that is mindful of the risks at hand and adaptable to the long-term changes created by this crisis.
