Earnings Season Off to a Rough Start

(Wednesday Market Open) After rallying yesterday, the market seems to be in a more sombre mood this morning as signs of the economic toll from the pandemic continue to mount.

Oil prices pulled back amid worries about demand from a global economy that the International Monetary Fund said is heading to its worst recession since the Great Depression. That weighed on energy stocks even as the financial sector was under continued pressure from weaker-than-expected earnings as big banks set aside funds to deal with a wave of expected loan losses. In economic news, retail sales figures for March fell by a record 8.7%. Retail sales were expected to be dismal, with a expectation forecasting a 10% decline.

Despite all that, the selling this morning doesn’t seem to be as intense as it has been in the recent past as Wall Street has been working its way higher in fits and starts as investors and traders try to feel out how solid the recent bounce is. And after all, there is bound to be some selling pressure in any market, but it’s an encouraging sign for bulls that that pressure seems to be moderating.

Swings and Misses

The financial earnings parade enters Day 2, with reports from Bank of America, Goldman Sachs and Citigroup, and it's looking like three swings and three misses—on top of earnings misses yesterday from JPMorgan Chase and Wells Fargo. BAC fell 2.7% in the premarket after reporting earnings per share (EPS) of $0.40 vs. consensus of $0.46. Net income was down 45% from a year ago, largely due to a $3.6 billion allocation to its loan-loss reserves.

GS shares are also trading lower this morning after reporting EPS of $3.11 a share, below consensus of $3.35 and well below the year-ago earnings of $5.71. But the recent spate of volatility did seem to help GS’ investment banking and trading division’s come in above expectations. Rounding things out was C, which also saw lower Q1 profits and came in below consensus, for similar reasons—a bulk-up of its reserves.

If you’re looking for bright spots in these bank reports, perhaps it’s that these banks are seeing lower net income largely due to the steps they’re taking to shore up their balance sheets ahead of expected credit losses. That’s a far cry from the last recession, in which over-leveraged banks not only couldn’t withstand the financial hit from the subprime mortgage meltdown, but essentially saw the weakness spill over into the rest of the market. Perhaps that’s a good sign, not only for the sector, but for the broader market.

In a bright spot for corporate news, GS initiated coverage on Tesla with a buy rating, citing the company’s leadership in the electric vehicle market, which has long term growth prospects. GS also noted the company’s early mover advantage, brand recognition, vertical integration, and success with the Model Y.

Might This Bounce Hold?

Investors seem to be wondering whether they can trust that this bounce we’ve been seeing might continue. If the premarket activity is any indication, that would be a “no.”

Volatility remains elevated, and though the Cboe Volatility Index (VIX) closed below 40 yesterday for the first time since early March, this morning VIX is back above that level. We have been seeing signs, however, that stocks and indices are once again starting to form trading ranges instead of wild swings that tend to exacerbate highs and lows and make standard technical analysis—with clearly defined areas of support and resistance—rather difficult. While only time will tell whether we’ve formed a true bottom—and remember earnings season has just gotten underway—it could take some very bad news to push the market toward a retest of the March low.

Turn Those Machines Back On?

And looking at the upside, a big question that seems to be keeping the market from breaking much higher is when the country will be able to get back to work in meaningful numbers. One thing that might do it? Any news that points to a reopening of the economy. There has been tension between some states and the president about who has the authority to direct the reopening of businesses and ease of social distancing mandates. But gains in the market Tuesday appear to point to some optimism about the government eventually allowing the reopening of the economy. President Trump said Tuesday that some states may be able to ease social distancing strictures before the end of this month. 

The solid rally yesterday also seemed to show that signs that the worst of the pandemic may be behind us encouraged investors. 

Regardless of whether the domestic economic reopening is directed federally or is done more piecemeal by the states, the timeline is still far from certain as it remains to be seen how long the pandemic will take to ease down to more manageable levels. The real test for the economy may be the middle seat test. Basically, when people feel comfortable enough to take a middle seat on a plane ride, we’ll know things are back to normal, whatever that may be post-coronavirus. We don’t seem to be there yet, and despite the rally in equities yesterday, there are signs that point to investors not being completely sold on the strength of the bounce, so perhaps not going all in or all out at once is still a strategy worth considering.

Gold shot to a multi-year high on Tuesday after the International Monetary Fund said the global recession will be the worst since the Great Depression. Investors may have also been leery of JPM and WFC setting aside funds to deal with people who can’t repay their debt. While that’s arguably a smart move from the banks’ perspective, it’s also an indication that plenty of general economic uncertainty remains. 

The U.S. government debt market was mixed, with the 2-year, 3-year and 10-year Treasuries seeing demand that pushed their yields lower, indicating nervousness among investors and traders. But the 10-year yield was unchanged and the 30-year yield rose, perhaps another reflection of optimism about the pandemic easing and the U.S. economy eventually being able to reopen.

In another bright spot, investors are no longer focusing only on holding companies with big balance sheets and lots of cash. TD Ameritrade clients have also started to move back toward chipmakers and other tech names—but a lot of its "old-school" companies with long earnings histories such as Cisco (CSCO).

As we continue to move through these historic and uncertain times, it seems that a tug of war between bullish and bearish sentiment will continue to play out on Wall Street and volatility will continue. That’s especially true as signs of the coronavirus’ physical toll ebb but its economic consequences become more clear. But with such a steep selloff behind us, there could be pent up demand that may help keep dips reined in as we continue to try to establish a bottom.

Worst Recession Since Great Depression: The IMF downgraded its outlook for global economic growth this year by 6.3 percentage points, saying total global growth would fall to -3%, assuming the pandemic and required containment peaks in the second quarter for most nations and recedes in the second half of the year. “This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis,” the IMF said. The IMF noted that for the first time since the 1930s, advanced economies and emerging markets and developing economies alike are in recession, a particularly troubling sign given that emerging markets tend to have strong growth rates. Growth in advanced economies are expected to fall by 6.1% while emerging markets and developing economies are projected to have growth rates of -1.0 percent in 2020, the IMF said. If you take out China, that last figure falls to -2.2 percent. 

Challenges for Emerging Markets: Although the economic malaise has spread throughout the globe, emerging markets face particular challenges. They’re often dependent on commodities prices, which have tanked as economies shut down and people have less need for gasoline in their cars and copper for new appliances. Or, for industries where there is demand, supply chains have gotten kinked, as factory workers have had to stay home. Year to date through Monday, the Rogers International Commodity Index, which tracks prices for 38 different raw materials, had lost more than 27%. 

Currency issues are also of concern for emerging markets. A stronger U.S. dollar, which has been bought as a safe-haven investment, lessens demand for commodities by making them more expensive for those holding other currencies. Also, global travel bans and the threat of illness, death, and getting stranded abroad mean many of the emerging market economies that are dependent on tourism won’t have that support to fall back on. Also, emerging market currencies have weakened amid the coronavirus pandemic, leaving those nations less able to pay down debt. 

Stocks Up Despite Dire Numbers: There was a time when the coronavirus was first coming to the attention of the general public as a serious issue when there were few numbers available on how bad things could get. That uncertainty was one reason stocks fell so sharply. Now that we’re getting more of a handle on how bad things are, stocks seem to be stabilizing at lower levels. And on a day when we got some very sobering numbers from the International Monetary Fund, stocks managed to rise, which is at least an indication that many in the market were not surprised that the international organization said the pandemic will far outstrip that of the global financial crisis and cause the worst economic downturn since the Great Depression.

Good Trading,


Dominik Stone

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