Kearney Ferguson / NYSE
At market open on Monday the Fed had announced it would backstop an unprecedented range of credit for households, small and major firms to offset the “severe disruptions” caused by the virus as well as expand as needed the purchase of US Treasuries and mortgage-backed securities. Stocks fell after the announcement, while government bonds gained, the US dollar fell, and gold rose (reflecting the traditional relationship of gold acting as an inflation hedge upon news of additional fiscal stimulus and presumed dilution of the dollar).
In the following three trading days, stocks saw their largest three-day rally since 1931 but then fell on Friday before the president signed a historic $2.2 trillion stimulus package later that night. Despite the Friday declines, the Dow and S&P 500 were still up 12.8% and 10.3% for the week- their best weekly gains since 1938 and 2009, respectively.
Although both major indices are 20% above their three-year lows, which technically constitutes a bull market, market participants still hesitate to call it a “bottom” and consider the rally as more of a “dead-cat bounce” since the uncertainty surrounding the coronavirus pandemic still prevails as the number of confirmed cases and deaths continues to rise and various economic indicators suggest more bad news to come before things get better. We knew anecdotally many people have gone without work as a result of the pandemic and the weekly jobless claims report on Thursday confirmed the worst- a record 3.28 million claims, an increase of 3 million from the previous week and four times the previous record of 695,000. Also, US consumer sentiment fell to a new three-year low on Friday, falling from 101 in February to 89.1 in March and companies are withdrawing their previously-issued guidance causing earnings estimates to fall.
An investor looking to navigate the ongoing turmoil may find refuge in the fact that stocks of many otherwise financially-stable companies are now “on sale” at attractive prices. Although it may not be a true “bottom” just yet, as Burton Malkiel suggests in “A Random Walk Down Wall Street,” dollar cost averaging a broad-market index fund may be the best approach for the average investor (an ETF like SPY may do the trick). Someone with a greater appetite for risk may consider more- resilient individual businesses that aren’t being as negatively impacted by the pandemic as others:
Amazon (AMZN) will weather the weeks and months ahead as more people opt for online shopping in observance of social distancing
GlaxoSmithKline (GSK), a pharmaceutical company that produces drugs for respiratory issues and infectious diseases, will continue growing sales
Walmart (WMT), the famous low-cost grocer, stands to benefit as people continue to panic shop for pandemic essentials such as food and paper products
Some areas to avoid besides hotels and cruises are airlines and oil and gas firms, particularly independent shale companies (as opposed to the vertically-integrated majors) as they are getting crushed by historically-low crude prices. The industry break-even price is about $40-$50 per barrel of West Texas Intermediate (WTI) and at the current levels of $22-$24 a barrel, it is only a matter of time before the more cash-strapped companies struggle to refinance their debt burdens and start declaring bankruptcy. Financial firms are already reporting an unprecedent demand for credit refinancing as several companies grapple with their fast-approaching bond maturity dates.
Additionally, a growing number of companies are seeking bailouts and one in particular to avoid is Boeing, which has expended billions to distribute dividends and engage in share buybacks, and later has had the gall to refuse granting the US government an equity stake in exchange for bailout funds. And even before the spread of coronavirus, Boeing had been awaiting FAA approval of the 737 Max, which some have suggested has a fundamentally unsound design and may never get off the ground to begin with.
In the week ahead, in addition to the weekly jobless claims due this upcoming Thursday, the US Bureau of Labor Statistics (BLS) will be releasing its March jobs report on Friday, in which economists forecast a loss of 150,000 nonfarm jobs and a rise in the unemployment rate from 3.5% to 3.9%. And much like last week, everyone, not just investors, will be looking at covid-19 numbers to gauge how much longer we’ll be experiencing suppressed economic activity. Italy’s cases appear to begin flattening while US numbers continue to grow, with a “peak” expected to happen sometime within the next few weeks.