Every week since the end of February, there have been announcements surprising investors, and last week was no exception.
Oil prices for the near futures contract went negative Monday, one day before expiry, for the first time in history. As might be expected, most major indexes lost ground as investors responded to oil prices and later in the week, economic news and Q1 earnings reports. The TSX was an outlier gaining 2% versus the S&P losing 1.3%, as well as other indices, fell about the same. The negative energy price initially weighed on the markets, but traders noted that there were extenuating circumstances caused by technical issues and lack of storage for delivery, forcing traders and even producers to pay people to buy their oil. By the end of the week, the lack of demand and global oversupply dominated investors’ thoughts.
By mid-week, news that the House of Representatives passed a $484 billion spending bill that provides additional funds for small business loans, hospitals and COVID-19 testing helped the market reverse Monday and Tuesday’s decline. By Thursday, an announcement by Gilead Sciences indicating a clinical trial for a potential treatment in China was inconclusive due to the lack of participants reversed the day’s gain. Led by Georgia, several states talked of re-opening, which worried many, including President Trump, who thought it could be premature. The return to the new normal will be a slow process as those consumers who lost their jobs may find it challenging to replace previous employment. Those who found their work suspended will have to play catch-up with their expenses as many took the opportunity to defer payments. The economic data this week confirmed we have yet to see the bottom with 4.4 million new jobless claims, bringing the total jobs either lost or furloughed to about 26 million since the start of this crisis. PMI data for services and manufacturing in Europe fell to lower levels than reported in the 2008 and 2009 financial crisis. In the US, the IHS Markit Manufacturing PMI fell to 36.9 in April from 48.5 in March, below market expectations of 38. (Anything below 50 represents a contraction in economic activity). This is the fastest decline in over 11 years as orders were canceled and restocking put on hold.
Another disturbing announcement came this week as another major meatpacking plant in Washington state announced closure, bringing the total to 11 significant plants. The closures represent a 25% to 30% reduction in pork slaughter and 10% in beef. This week marks the first big chicken plant closing with experts warning of shortages in the first week of May. The supply is available, but processing is impacted by COVID-19-related staffing shortages. As mentioned before; it was only time before the lockdown affected the food supply chain.
Earnings season continues this week, with about one-third of the S&P 500 companies reporting. Just like the banks the previous week, no one is offering any guidance for the remainder of the year. What is clear, however, after a sharp sell-off plunging the market into bear market territory, the market has rallied 29% over the last three weeks as investors become optimistic over declining virus infections and returning to normal. This rally brings the market back to the same levels as it was just ten months ago when S&P 500 EPS estimated earnings were $174 versus today at $110. Current levels would suggest the market is fully valued, and one could argue overpriced, considering the uncertainty of the rate at which regular activity will resume after a global shock of unprecedented portions.
We continue to be cautious and patient investors in this environment.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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