Sunday, April 5, 2020

Amidst Coronavirus-Impacted Q120 Corporate Earnings, Some Hopeful Signs

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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