Sell in May And Walk Away? It's Starting Out That Way

(Friday Market Open) Those investors who want to sell in May and go away, as the old adage goes, look like they’re getting an early start.

The mood in overseas markets that were open overnight was somber after Wall Street lost ground yesterday, and that selling mood has continued into this morning as investors continue to digest earnings season.

Investors are also digesting comments from President Trump that he is considering punitive tariffs on China in connection with its handling of the coronavirus. The recent tariff war between the world’s two largest economies is probably something investors would like to forget. So a revival of those worries when the market, and the world, are also dealing with what’s likely the worst economic pullback since the Great Depression seems to be enough to add to investor worries about corporate issues.

Earnings Roundup: E-Commerce, iPhones, and Oil

Shares of Amazon (AMZN) are taking it on the chin this morning, as Q1 earnings per share of $5.01 came in well below consensus of $6.25. Also dragging on the stock is the company's plan to spend essentially all of its expected Q2 profit—to the tune of $4 billion—on its coronavirus response plan, in what CEO Jeff Bezos called "“the hardest time we’ve ever faced” on yesterday's conference call. One big thing the company is spending more money in is wages, as it has been hiring to deal with a surge in demand for online orders during the pandemic. 

But while this 5% pre-market selloff is quite a chunk, it’s important to remember just how far AMZN shares have traveled since the mid-March market depths—from a low of $1626 per share to a new all-time high of $2475. So perhaps a bit of a pullback is to be expected. For what it’s worth, several analysts have raised their price targets on AMZN this morning—including Susquehanna, which raised its target to $3000.

Investors are also pulling the reins on Apple (AAPL) this morning, with shares down over 2.5% ahead of the open, despite reporting earnings that came in ahead of consensus. Though CEO Tim Cook expressed “great confidence in the long-term of our business,” the company declined to offer short-term guidance due to the many uncertainties surrounding COVID-19, which include not only possible production challenges, but also the closure of its retail outlets due to the pandemic.

One potential bright spot for shares? AAPL reiterated yesterday that it will go forward with its plans to use some of its ample cash stash to buy back shares. Not only could this be a positive sign from a supply-and-demand standpoint, but it can also be taken as a sign of confidence that the company can weather the storm.

And now to energy, including Chevron (CVX), ExxonMobil (XOM) and Phillips 66 (PSX)—all saw shares decline ahead of the market open. As a whole, earnings were mixed relative to consensus—some beats and some misses—but considering the precipitous decline in crude oil (/CL) as commerce ground to a halt, expectations had already been greatly diminished. It seems to be a foregone conclusion that the oil services industry is in for a tough slog.   

This looks like a clear resolution to the $SPX's rising wedge. Impressed that it is happening on a Friday where much of the world is offline for a market holiday

Best Month For Stocks in Decades

U.S. stocks finished out April on a down note yesterday as participants may have been booking some profits after another round of dismal data. Thursday data showed another week of huge losses in the jobs market, as measured by unemployment claims, and personal spending posted its worst drop on record.

Still it’s arguable that those numbers were expected to be bad and were largely baked into the cake and that traders and investors for the most part seem to be of the mindset that they’re willing to wade into the market recovery. But caution still seems to be the watchword as the world isn’t out of the woods with the pandemic yet—neither from a safety standpoint nor an economic one—as we were reminded again by yesterday’s releases and comments from AAPL and AMZN.

For the month as a whole, April saw a remarkable recovery, with stocks regaining a big chunk of what they lost in the coronavirus-related selling in February and March. Each of the three main U.S. indices had its best month in decades.

U, V, or W?

Although no one can rule out a W-shaped stock market recovery, right now things are looking pretty V shaped, even if for a moment. But even though the market is forward looking, it isn’t the economy, and the data that keep coming out indicate that the recovery on Main Street could be more of a U shape. 

Interventions by the Federal Reserve have helped boost the market and could mean that Wall Street could continue to outperform Main Street, where government help may not have had as big of a regenerative impact on businesses that were forced to close and households that have lost income.

Still, the recovery in stocks is a reminder that there wasn’t anything really terrible going on with the economy before the outbreak. It was a medical issue, rather than a financial one, that started the selloff and economic pain in the first place. 

Next Week In Earnings, Economic Data

Looking forward, next week includes earnings reports from Disney (DIS) and General Motors (GM). 

It could be interesting to see how Disney is coping with the pandemic, as it has shuttered theme parks, which form a big chunk of its revenue. But it’s also an entertainment streaming company and has a deep bench of well-loved titles which could be helping it out as people stuck at home want to binge watch entertainment online. 

As for GM, the company is one of the automakers who have halted production. And the coronavirus is also weighing on car sales as face-to-face interactions have been greatly curbed and as people have less money to spend on big-ticket items. It could be interesting to see if this economic bellwether has anything to say about its outlook for its own recovery, which could go hand in hand with that of the wider economy. 

As for next week’s economic calendar, we’ll get data on March factory orders and another weekly unemployment claims number that is likely to be closely watched. 

The big report comes at the end of the week in the form of non-farm payrolls for April. It seems likely that the figure won’t be pretty, but at the same time this report is backward looking and the stock market seems to have moved on. Of course, if there’s a print that’s truly much worse than expected, that could have an adverse effect on the market.

Jobless Claims Keep Trending Down: Jobless claims continue to be terrible but they are also easing from their worst numbers. Thursday’s data showed U.S. weekly new jobless claims reached 3.84 million, substantially higher than the consensus expectation of 3.05 million. The prior week’s number was also revised higher to 4.442 million. With more than 30 million people having filed for unemployment since the coronavirus really began taking a toll on the economy, it seems odd to talk about bright spots. Still, this week marked the fourth week in a row of declining jobless claims. And with some states beginning to reopen, it's possible that the worst headline numbers on initial claims are behind us.

Inflation Eases: It looks like all the e-commerce sales and stocking up on toilet paper and other staples at grocery stores wasn’t enough to make up for people not being able to spend at restaurants or other businesses that were closed. Data yesterday showed that personal spending fell 7.5% in March—the worst drop since records began in this category back in 1959. But the data also showed that headline personal consumption expenditure prices fell 0.3% in March while core prices dipped 0.1%. While lower inflation can be good for maintaining the value of savings, it can also be a sign of sluggish economic activity. And even before the pandemic, the Fed was having trouble hitting its target annual inflation rate of 2%. Now that seems even farther from happening.

GDP Drop May Worsen: As bad as the March spending report was, things may be worse next month and contribute to an outsize decline in gross domestic product (GDP) in the second quarter. “The key takeaway from the report is that it is a precursor to what will be much worse data for April, which will drive a much worse decline in GDP than the 4.8% annualized decline registered in the first quarter,” said. The latest estimate from the Atlanta Fed’s GDPNow model—a mathematical model designed to provide a running estimate of GDP based on economic data as it’s released—is showing a 12.1% contraction in GDP in the second quarter as of yesterday. The Atlanta Fed will update its forecast later today to include this morning’s ISM and construction spending data.  

Good Trading,


Dominik Stone

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