If you go to the doctor you've probably witnessed that furtive doctor-nurse conference: after which the doctor disappears, the nurse shows up with a gigantic syringe filled with milky fluid, a needle like a jousting lance and a big phony smile . "Well, this may sting a bit."
If you've had that experience, you've got a good idea of what securities markets were like last week. Nothing agonizing on the surface: the major indices ran about break-even for the week. Sector indices were about halvsies, some up a bit some down a bit. There wasn't much to choose from among large, mid and small cap issues. Even the recent weirdness in bond and currency markets seemed to tame.
Under that calm surface, fear dominated as stock market volatility approached 4X normal levels. The earnings parade continued: Mega caps reported disappointing earnings and almost imperceptible revenue growth. More companies canceled dividends than canceled in the last ten years combined. More companies reduced dividends than in any week since 1980. Rather than toss spears at dartboards, or as one CEO put it: "Grope on the floor of a dark room looking for the light switch" many companies declined to give forward guidance.
We've gotten so inured to bad news in the real economy that 3.8 million new unemployment claims and a 16% unemployment rate seem more a relief than a shock. Likewise, last week's Q1-GDP report indicated a 4.8% contraction - surprisingly small by some estimates, though it ranks as one of the largest in history. (Fair disclosure: Cambyses Capital expected something like 6.5-7.2%). The Q1=GDP figures reflected only two weeks of lock-down. We anticipate much gloomier news for Q2. Several Administration sources have predicted 20-30% Q2-GDP contraction.
We've finally conceded that current GDP and Trade trends give us no justification for optimism. Our previous forecasts predicted a fairly rapid post-lock-down bounce-back in Q3-2020, followed by resumed growth below and parallel to pre-lock-down levels. That forecast assumed the lock-down would last 6-10 weeks and assumed little, if any structural change to markets. We're now at 8 weeks of lock-down with no real end in sight. We're looking at fundamental but ill-defined changes to labor market structure, and supply chains. Looks like we're going to modify our model - but it has us scratching our heads. We'll revisit this in a week or so - once we have some testable hypotheses. In the meantime - send us your thoughts.
And what weekly report would be complete without a pargraph or two about the fossil fuel energy market - oil in particular. The news here is mostly financial - though a look at supply / demand conditions in the market might be appropriate. [the oil market is presently swamped with supply and demand is impaired. The next industry crisis will be to figure a place to store the noxious stuff.] Now comes word that several major banks, one of whom holds a $1.2 trillion fossil fuel loan portfolio, have refused to underwrite expanded exploration or drilling projects. In an industry that lives (notice we didn't say "thrives") on excess financial leverage, that is Bad News. Add that the banks have begun to scrutinize every proposal with a jaundiced eye toward environmental impact, and you have an industry that is in far more trouble than even $15 / bbl crude would indicate.
This week should be relatively calm: at least as financial reporting is concerned. Apart from the weekly employment report, there are no major scheduled events. Listed companies will continue to report disappointing, but not surprising operating results and probably cut dividends. Forward guidance will be thin on the ground.
The Trump-Xi "dialog" will heat up again, despite US intelligence reports that indicate DT and Pompeo are probably wrong... but that's not unusual; we should be used to it by now.