The market is finally reacting to bad economic news



Updated May 1, 2020 10:55 a.m. ET / Original May 1, 2020 8:47 a.m. ET

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A man wearing a mask walks past the New York Stock Exchange in New York.

Photo by JOHANNES EISELE/AFP via Getty Images

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No economy. No jobs. No problem?

That’s how it appeared judging by April’s incredible stock market performance. the


S&P500

jumped nearly 13% and is up 33% from its lows. With numbers like that, you’d think things must be going well.

They are not. Nearly 900,000 cases of Covid-19 were diagnosed in the United States in April and more than 20 million Americans filed initial claims for unemployment during the month. Yes, we know the market is looking to the future. It is not March or April 2020 that sets stock prices. This is what is likely to happen in March or April 2021. But it seems extreme.

This is especially true when looking through the lens of corporate earnings.


from Amazon.com

(AMZN), in particular, are a warning to investors. The e-commerce giant’s sales jumped about 26% year-over-year in the first quarter. Profits, on the other hand, fell nearly 30% because operating in a Covid-19 world is expensive.

With stocks falling Friday morning, maybe the market is starting to take notice.

***

Is May the month to “go away” in the markets?

the


Dow Jones Industrial Average

just had its best month since 1987. The benchmark climbed 2,429.56 points, or 11%, as trillions in fiscal stimulus and optimism about efforts to fight Covid-19 helped fuel the race.

  • The battered energy sector led the charge, with that part of the S&P 500 up nearly 30% since early April, a record month. Consumer discretionary stocks jumped 20.5%, while utilities lagged with just 3.2% gains.
  • Of course, those returns only came after the market’s worst March since 1938. Although the Dow Jones is up about 31% from its March lows, it is still down 17.6% from the top of the bull market.

And after: Those who follow the old adage “sell in May and go” may feel even more vindicated given the recent run. Just keep in mind that the dreaded May-October period has actually surpassed the November-April one, at least for the past five years, according to Dow Jones Market Data. Of course, historical models do not take into account the extraordinary circumstances of today.

***

Who will be flying in Europe when all this is over?

It will take years for European airlines to recover from the coronavirus crisis, as they are beginning to recognise.

Ryanair (RY4C.DB), Europe’s largest low-cost carrier, was the latest to announce an interim survival plan on Friday. The company will cut 3,000 jobs, or 15% of its workforce, and cut the salaries of the remaining staff. The company estimates that it will take at least two years for traffic to return to last year’s level.

  • British Airways said earlier this week it would cut up to 12,000 jobs, or 30% of its workforce as parent company IAG warned it would take “several years” to recover.


  • Air France

    (AF.FR) is bailed out by a 7 billion euro ($7.68 billion) loan from the French government, as the Italian state takes full control of Alitalia.

  • According to union representatives, the German carrier


    Lufthansa

    (LHA.XE) is considering filing for creditor protection.

And after: Airline executives know that stranded travelers, idle fleets and furloughed pilots are just one of their problems. They fear the long-term consequences of the changes the coronavirus crisis will bring to the way people travel. State bailouts and nationalizations are only short-term remedies.

***

Federal Reserve expands Main Street lending program

The Fed has been scrambling to set up its own business loan program as an alternative to the headline-grabbing Paycheck Protection Program. The Fed’s $600 billion plan will allow companies to apply for loans from banks, which will then sell most of the debt back to the Fed.

  • The Fed’s recent changes to the program will allow more businesses, large and small, to be eligible for loans.

  • The Fed says companies with up to 15,000 employees and $5 billion in annual revenue can participate in the program, superior to its initial orientation.

  • The loans, which must be repaid but come with an optional one-year payment deferral, will be just $500,000, a reduction from the program’s original $1 million minimum.

And after: There is no set date for the launch of the program, but the Fed has said The Wall Street Journal Thursday that a date will be announced “soon”. When it comes online, central bank support will help provide credit to companies that are too big to qualify for the SBA program but too small to have easy access to capital markets.

***

White House considers financial retaliation against China

President Donald Trump told John Roberts of Fox News that he believed the novel coronavirus originated from a lab in China. US intelligence officials have publicly stated that the Covid-19 virus “was not man-made or genetically modified”, but confirmed they were investigating whether the outbreak started in a lab in Wuhan.

The President said this after a report from the Washington Post who said US officials were beginning to look for ways to make China pay for its role in the coronavirus pandemic.

  • Among the ideas considered are strip China of its sovereign immunitywhich would allow China to be sued for damages, and to cancel part of the debts of the United States towards China.

  • None of these ideas have been finalized, the Post notes, and White House discussions are still in their preliminary stages.

And after: China has resisted suggestions that it should compensate other countries in any way for the coronavirus outbreak. Trump has made it clear that China’s role in spreading the disease is a priority. He said Thursday that any tariff deal is now “secondary” to China’s role in the pandemic.

***

A number of states are beginning to ease lockdown orders

According to a model from the Centers for Disease Control and Prevention.

  • Georgia Governor Briam Kemp lifted the state’s stay-at-home orders at midnight Thursday, after already allowing a significant number of businesses to reopen.

  • Texas, Alaska, Florida, Ohio, Oregon and Pennsylvania are also among the states that have already or will begin to allow the resumption of certain businesses and activities.

And after: Even though polls show broad support for stay-at-home orders, state and local lockdown orders have been politicized by the White House. It will probably continue, with Trump plan gatherings in Arizona next week, followed by Ohio.

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