The stock market may very well have another tough week or so as Q120
corporate earnings are begin to be released, but there are some hopeful signs.
The
upcoming Q120 Corporate Earnings releases will reflect the shutdown of
much economic activity in the US and China. Macroeconomic
considerations support expectations of a significant y/y decline. And,
the Q220 earnings outlook is even worse.
But, on a
positive note, there is reason to be hopeful that the worst of the
virus' impact will be behind us soon. A peaking of the virus' infection
rate is expected around April 11. And, it may be there already in NY,
according to Governor Cuomo.
News of a peaking in the
infection rate and favorable results from drug tests would spur hope for
a return to normalcy in the economy. Although a quick return is not
expected at this point, the stock market tends to anticipate such
developments.
Results of the just-begun medicine tests
presumably should become available over the next few weeks. There
already appears to be hints that some medicines are working. Increases
in the discharge rate from hospitals would indicate success, and this
rate appears be rising in NY.
Besides these favorable developments regarding the virus, an OPEC-Russia oil output cut agreement is
likely this week, although Monday's meeting has been delayed. And
coordinated European fiscal stimulus is expected. To be sure, oil
prices already may have largely reacted to news of an agreement. And,
the fiscal stimulus already was announced, and there may be questions
about its adequacy.
The macro fundamentals are not
favorable for Q120 Corporate Earnings (see table below). US Real GDP
Growth slowed as a result of the virus-induced economic shutdown. Oil
prices plummeted. And, the dollar appreciated sharply, making earnings
from abroad weaker in dollar terms. While European economic activity
improved somewhat in January-February, pushing up the Q120 Eurozone PMI
average, activity slowed sharply in March. Moreover, China's economy
was very weak, as the virus shut major parts of it in February and part
of March. Profit margins look to have shrunk a bit.
The
consensus estimate of Q120 S&P 500 earnings is about -5.0% y/y, but
this is likely an obsolete estimate. More up-to-date estimates put
them around -25%. The y/y drop in Q220 should be even bigger. But, the
latter is seen as the biggest quarterly drop of the year. By the time
they are reported, they could be viewed as not indicative of the future
and thus ignored. Next year's corporate earnings are expected to
rebound sharply.
Initial Claims should be the most
important US economic data this week. Consensus looks for another large
print of about 5.0 Mn, versus 6.6 Mn in the prior week. A
significantly larger pullback would hint that the hit to the economy has
reached its peak. Continuing Claims would need to start falling as
well to confirm that the worst is over, as it would show that rehiring
has begun. Other data this week are the March PPI and CPI. Consensus
looks for low prints of 0.0% m/m Core PPI and 0.1% Core CPI -- which the
markets could interpret as reflective of economic weakness.
Curiously,
a recession has occurred in 5 of the 6 past years ending in 0. There
were recessions in 1960, 1970, 1980, 1990, and 2000. 2010 was a
recovery year. So, the virus-induced recession in 2020 is consistent
with this history. Their average length of time was 9 months, ranging
from 6 to 11 months. The current recession's length will depend on
progress against the virus and how quickly businesses can resume as
normalcy reasserts itself. Most economists see a recovery beginning in
H220. If so, this year's recession would be one of the shortest in
years ending with a 0.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9
3.2 2.1 51.9
Q219 2.7
-12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
Q120 1.3 * -23.6 +6.0 3.3 2.3 47.3
* Atlanta Fed Model's latest projection
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