Last week most markets rallied for the second week in a row. The Dow was up over 2%, the S&P 500 just over 3%, and the TSX gained 1.3% with large-cap and growth stocks outpacing small caps and value stocks. Chipmakers, pharma and managed healthcare were leaders during the week. Surprisingly, given the influence of COVID-19, airlines, cruise lines and hotels rallied, which was attributed to a short squeeze. The week started with earnings announcements from JP Morgan, Wells Fargo and Citigroup. As expected, earnings and profits fell as banks increased their loan loss provisions over Q1 of last year. JP Morgan, Wells Fargo, and Citigroup reported profit declines of 70%, 89% and 46% respectively. Loan loss provisions for JP Morgan jumped to $8.3 billion from $1.5 billion for Q1 last year. Citigroup jumped to $7.6 billion compared to $2.2 billion, and Wells Fargo increased its loan loss provisions to $4.8 billion compared to $1 billion the previous year. The banks gave little guidance for what lies ahead for future loan loss provisions. If 2008-09 is any indication, the $24 billion reserved by the Big Four banks will be woefully short based on signs of defaults and bankruptcies about to be unleashed. Fact Set expects other sectors to fair relatively better with an overall earnings decline of 14.5%.
Economic news continued with the US Commerce Department reporting a decline in retail sales of 8.7% while grocery gained 26%, offsetting restaurants and bars sales. Another 5.5 million people filed for unemployment, bringing the total over the last several weeks to 22 million and erasing all the job gains since the great recession. Earnings will dominate the news this week with about 20% of the S&P reporting, and economic data will include the Purchasing Managers Index, existing home sales, and winding down the week with consumer sentiment on Friday.
There was positive news over the last week as the quarantine policies finally showed signs of success and the initial projections of infection rates and deaths were on the decline, causing investors to look ahead to a return to normal. Global governments began discussions about plans of reopening economic activity in phases to minimize the potential for a resurgent of new cases and fatalities. While some governments will continue with the lockdowns, such as France until May 11 and the UK for three more weeks, Germany will resume auto production, Austria will allow small shops to reopen, and Spain will allow non-essential industries to open. Meanwhile, the White House provided some suggested guidelines for a three-phase program for the states to return to normal at their discretion. Additionally, the US Fed added another $600 billion for new 4 -year low-cost loans to small and medium-sized businesses and another $500 billion for states and municipalities. This week it is expected Congress will add funding to the Cares Act Paycheck Protection Program (PPP), which ran dry this past week. The EU is also talking about a 500 billion Euro loan package to support businesses, workers and countries, and a new 100 billion Euro unemployment insurance program. Liquidity abounds as growth rates are expected to fall off a cliff before recovering next year. The IMF is expecting Eurozone growth to fall 7.5% and recover next year with a 4.7% growth.
While all this liquidity is considered positive and necessary from a short-term perspective, debt levels were unsustainable before the crisis and they could very well tip the scales for sovereign restructuring sooner rather than later. The unintended consequences of the economic lockdown will send reverberations not only economically but socially for years to come.
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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