Two Headwinds Investors May Be Overlooking

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Stocks in the U.S. rose by midday Tuesday, after having been down in the morning. All market moves were muted. 

The S&P 500 rose by as much as 0.3% Tuesday, before all three major indices dipped back into the red by not much more than 1%. 

Regardless, the price of stocks is currently supported by the hope of short-term liquidity in the economy provided by the government. 

The 10 year treasury yield held steady at around 0.68%, with the Federal Reserve pumping billions of dollars daily not the treasury market to try to bring credit spreads down so liquidity-starved companies can enjoy a lower cost of borrowing. 

Also aiding sentiment was a whisper that Congress will add $600 billion to its already large $2 trillion fiscal spending program. 

All stimulus measures can hold the economy over for a few months.

"The relief payments are not going to be a panacea, but it can be a valuable bridge for households that have seen a disruption to income," Bankrate.com's Chief Financial Analyst Greg McBride told TheStreet. 

If the coronavirus keeps on spreading, more stimulus will be necessary to keep employment and consumer and business spending somewhat stable. 

It’s those two data points — the virus’ spread and unemployment — that could cause more volatility in the near-term. 

Here’s a grim blurb from a research note from 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.” 

His chart shows Morgan Stanley is still looking for the rate of increase in cumulative confirmed cases in the states to flatten by the end of April. 

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 looking to worsen in the near-term. 

Market participants and analysts say that upcoming economic data, which will give the full virus-economy picture, will spark negative investor sentiment while earnings growth estimates for the next two years could fall even more from here. 

"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,” said Brian Nick, chief investment strategist at Nuveen. "However, they are unlikely to show the full force of the economic shock that hit the economy in the latter half of March.”

Notably, the price of crude oil bounced 2% from its 18-year low hit Monday, with the smaller more indebted explorers seeing the biggest swings to the downside and upside. Apache  (APA) - Get Report, which is down from $35 a share in January to just above $4 a share now, rose 8% Tuesday. 

The company, which has massively cut production (by 9% for the year) as revenue will fall, is maintaining its ability to generate cash. As "it halts its onshore drilling program,” Stifel analysts wrote in a note, the company can execute "a free cash flow positive 2020 plan.” Stifel's price target is $8, which uses a 20% discount rate on free cash flow, an incredibly high rate of return that investors demand to receive excess over. 

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