Stocks fell Tuesday, after having started the day marginally higher. Many on in American business are beginning to admit their profit models — both macro and company specific — are becoming almost useless, as the spread of the coronavirus seems indefinite.
All three major U.S. indices fell around 1% Tuesday, with the S&P 500 down 1.6%.
In the last week or so, stocks haven’t fallen or risen by much, as the market has calmed a bit. The S&P 500 is essentially flat since March 17.
The $2 trillion spending bill from Congress — to support near-term liquidity for starved households and businesses — is giving the market confidence that a recession will be padded by policy. There are whispers of $600 billion added to the plan. And the Federal Reserve is supporting interest rates across the bond market as well as providing short-term funding though the repo market to other central banks.
As the market has rebounded, with the S&P 500 bouncing 15% from its 2020 low, the market is now pricing in a recession to a lesser degree than it was before. Expected earnings for the next 12 months could yield an investor 7% more than the 10 year treasury could a few weeks ago. Now, that premium is under 6%. It gets to 9% before some recessions, historically.
Looking forward, data is emerging showing that the spread of the virus in the U.S. is showing no signs of abating.
Meanwhile, poor economic data, which the market had priced in, and is now beginning to overlook as stocks rise, is trickling in. Data from Paychex shows that small business employment is starting to fall. Paychex’s index on the statistic has fallen 0.57% year-over-year for the month of March, with those numbers likely to worsen in the near-term. And the latest GDP reading did not encapsulate much time in which the U.S. economy was impacted by the coronavirus.
Some on Wall Street have found, for the time being, an opportunity in investment grade bonds.
Here’s what Wall Street has to say:
James McDonald, CEO, Chief Investment Officer, Hercules Investments:
"When the exact severity of the economic consequences from the Virus becomes apparent from economic releases beginning tomorrow morning with the ISM report, the market will begin (again) to crumble. In the past week, the S&P 500 has seen a recovery of 20.4%. If you believe yesterday’s [Monday’s] S&P price level of 2626 is going to last, then you’re implicitly assuming things are better for the US economy now than they were in November 2018. Obviously, this couldn’t be further from the truth. The Virus has decimated a vast array of businesses and industry’s here in the U.S. over the past month and likely for months to continue. The worst of stock market losses is yet to come.”
Matthew Harrison, Morgan Stanley’s Head of Biotech Research:
“In the United States, trends continue to deteriorate with the U.S. exhibiting the fastest rate of growth in new cases, cases growing faster than testing capacity, mortality growing exponentially and new “hot spots” developing in the interior of the country which create risk of a second wave of infections in the U.S. which could delay the time to peak.”
Brian Nick, Chief Investment Strategist, Nuveen
"The March employment report is likely to show the U.S. economy failed to create positive jobs growth for the first time in any month since 2010, but the decline won’t be as dramatic as the initial jobless claims number last week because the surveys were conducted during the week of March 9th. However, they are unlikely to show the full force of the economic shock that hit the economy in the latter half of March.”
Anwiti Bahuguna, Head of Multi-Asset Strategy, Columbia Threadneedle Investments:
"The first official measures of the economic impact of coronavirus are being released, and it is now all but inevitable that we will see a deep contraction in economic activity in the U.S. as a result of the shutdown implemented to contain the virus. The present situation is so novel (like the virus itself) that applying historical models to forecast what we may see is a significant challenge. what we are experiencing now is the equivalent of putting a patient in a medically-induced coma — a calculated, temporary risk with the goal of establishing greater longer-term health. Given that we don’t know how long the shutdown may last, it is now almost impossible to predict U.S. growth in the near term, i.e., the second quarter."
Solita Marcelli, Deputy Head of Chief Investment Office, Americas, UBS
"During the fastest selloff in history by some measures, it was not a surprise to see "the baby thrown out with the bathwater." Many stocks that have strong balance sheets and long-term cash generation power have been hit just as much as those that are much weaker. This has created an enormous opportunity to own high-quality names that will differentiate themselves once dust settles. Two weeks ago, the selloff has been characterized by the freezing of credit markets. Last week, after Fed’s QE announcement, markets began to thaw. With Fed positioning itself to buy investment grade bonds and ETFs, the asset class has become much safer to own. Given the widening of yields, they are also a decent substitute for Treasuries, especially at the very short end of the curve where Treasuries offer hardly any yield.”
Caterpillar, March 26:
"The continued spread of the COVID-19 pandemic is starting to impact Caterpillar’s supply chain. Due to uncertain economic conditions resulting in weaker demand, potential supply constraints and the spread of the COVID-19 pandemic and related government actions, Caterpillar is temporarily suspending operations at certain facilities.”
Notably, oil rose 1.5% after an ugly Monday. That;s especially beneficial to the most indebted oil companies; the small ones.