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02 May, 2020 Market Commentary

Estimates of an Unprecedented Economic Collapse


All blog content is for information purposes. Any reference to indivisual stocks, indexes, or other securities as well as all graphs and tables are not recommendation but only referenced for illustration purposes.

Market Commentary for the week ending May 2nd, 2020

Summary

  • Estimates for second quarter Gross Domestic Product (GDP) suggest it could fall more in one quarter than it did during the worst 4 years of the Great Depression.
  • Gilead Sciences (GILD) remdesivir shows signs of helping cure COVID-19.
  • Stocks closed mixed with small stocks outpacing large stocks.

 

U.S. Gross Domestic Product

GPD falls in the first quarter but is forecast to plunge like never before in the second quarter.

First quarter U.S. Gross Domestic Product (GDP) fell by a staggering -4.8% which was worse than economists’ estimate of -3.9%. This is the biggest drop since the Financial Crisis of 2008 and brings to an end the longest economic expansion in history at 11 years. Because the economy was locked down for only about one of the three months, the number really does not provide a full picture of current economic activity.

Consumer spending, making up the biggest portion GDP, fell by a whopping -7.6% with the biggest drop being in the purchase of automobiles. Separately motor vehicle sales fell to an annualized rate of 7.3 million in April from 11.4 million the month before. Business spending also shrank with a -10% drop in spending on buildings and a -15% drop for equipment.

Current estimates for second quarter U.S. GDP are for a collapse of -20% to -40%. Such a drop is unprecedented in modern history for any economy. As the accompanying graph shows, during the Great Depression GDP fell for 4 consecutive years from 1930 – 1933. The total GDP decline during this 4 years was -26.3% and we’re now looking at that happening in just one quarter!

Change in gross domestic product (GDP) 1930-1936

Source: www.bea.gov

The million dollar question is how fast will the economy recover? There are many theories and forecasts but this is new territory with nobody really knowing how this epidemic will change behaviors longer term.

This Week’s Performance Highlights

Market Indexes week ending May 1, 2020

Source: www.YCharts.com

  • The big news of the week came from Gilead Science (GILD), a pharmaceutical company with more than $22 billion in revenue, that its drug remdesivir has shown signs it can help patients with COVID-19. The entire market rallied on the report with the year’s worst performers generally gaining the most. Later in the week the FDA granted Gilead emergency authorization for treatment.
  • Large U.S. stocks closed the week marginally lower with the S&P 500 down -0.2%, Dow Industrials down the same, and the NASDAQ Composite off -0.3%. It had been another relatively strong week up to Friday when the indexes fell -2.6% to -3.2%.
  • The rebound in energy stocks continued this week gaining another +3.6% adding to the prior week’s gain of +2.0%. This rally will be an interesting one to watch as the price of oil collapsed a couple of weeks ago but has recovered some to close just below $20 per barrel. This current price is off from the start of the year above $60 and the general outlook for oil is that supplies remain high and demand weak.
  • Technology stocks gained a small +0.3% for the week and are only down -2.5% for 2020. This has been a remarkable performance. Helping this sector have been generally better than expected earnings for the first quarter from such companies as Apple (APPL), Microsoft (MSFT), and Qualcomm (QCOM). The challenge though, like for many other stocks and sectors, is that the outlook is unclear with many companies pulling guidance for the remainder of the year.
  • Small U.S. stocks closed higher by +2.2% as investors’ hope rises these smaller companies will not be harmed as much as originally expected due to the economic shutdown. During a less than 2 week period of time late in April small stocks outperformed large by more than +7.5%.
  • International stocks were mixed with developed countries inching higher by +0.2%. The performance was mixed by region with Australian stocks down -1.3%, Japan’s market was virtually unchanged, and European markets were high on average by +1.9% helped by Germany, Spain, and Italy’s markets all gaining about +2.5%.
  • Emerging markets were off -0.7% with big differences from country to country. The winners this week were Brazil up +6.4% and Mexico jumping +5.2% while still down -50.3% and -37.6% respectively for the year. The biggest of the emerging markets, China, posted among the worst performance for the week down -2.4% but are only off -14.6% for 2020.
  • There are a lot of questions about what’s in store for real estate stocks both short-term and long-term which has resulted in above average volatility for these stocks. Will apartment renters be able and willing to continue paying rents? Can retailers and businesses pay their rents? How many businesses will fail leaving large vacancies? Will companies cut back on office space as more workers work from home permanently? How these issues play out will have an impact on the value of real estate for some time. This week the stocks were up +2.5% but their losses for the year are more than double the S&P 500 at -25.7%.
  • Gold shed a portion of its year-to-date gain down -1.8% for the week but still higher by +11.8% in 2020.
  • Commodities were helped by a recovery in the price of oil from historic lows gaining +1.6% for the week.
  • Bonds were little change for the second consecutive week down just -0.1% this week.

Economic Indicators

The employment picture continues to worsen with another 3.8 million people filing for unemployment this week bringing the total to more than 30 million in just six weeks. This is a slowdown from the weeks before but it is still expected that many more will file and others are not yet counted as they are simply waiting on states to process their filing. The pace at which the economy can reopen will be certainly have an impact on hopefully stabilizing these numbers.

Consumer Confidence collapsed in April falling to a reading of 86.9 from 118.8 the month before. When digging into the numbers you see that consumers’ views of the current economy sank by a record amount to 76.4 from 166.7 while their expectations for the future rose to 93.8 from 86.8 in March.

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  • ISM Nonmanufacturing Index
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