The Coronavirus Depression?

Fred Imbert, Silvia Amaro and Thomas Franck report the Dow drops more than 300 points to close out another wild week on Wall Street:
Stocks fell on Friday to end another volatile week of trading, pressured by a spike in coronavirus-related deaths in New York while investors digested a dismal U.S. jobs report.

The Dow Jones Industrial Average slid 360.91 points, or 1.7%, to 21,052.53. The S&P 500 dropped 1.5% to 2,488.65. The Nasdaq Composite also pulled back 1.5% to close at 7,373.08.

Wall Street posted its third weekly decline in four. The Dow lost 2.7% this week while the S&P 500 fell 2.1%. The Nasdaq ended the week down 1.7%.

New York Gov. Andrew Cuomo said deaths in the state rose by 562 in 24 hours to more than 2,900 for the biggest increase to date. Cuomo added the curve of confirmed cases “continues to go up,” noting there are now over 100,000 cases in New York state.

“This still feels like something we’re heading into, not heading out of,” said Brian Nick, chief investment strategist at Nuveen. “We can see the light behind us, but not ahead of us.”

“The upside scenario is disappearing very quickly and the base case is getting worse,” said Nick.

There have been more than 261,000 confirmed infections in the United States and more than 6,600 deaths from COVID-19, according to data from Johns Hopkins University. Globally, more than 1 million cases have been confirmed.

Massive job losses in the US

U.S. payrolls fell by 701,000 in March, marking the worst jobs report since 2009, while the unemployment rate jumped to 4.4%. However, the report failed to capture the full extent of the ongoing economic blow from the coronavirus outbreak. On Thursday, the Labor Department said jobless claims jumped by a record of 6.6 million for the week of March 27.

“Today’s nonfarm payrolls data confirms what we’ve already known: the U.S. economy was doing well before COVID-19′s impact was felt, and COVID-19′s impact has been severe,” said Lauren Goodwin, multi-asset portfolio strategist at New York Life Investments. “Job losses will continue to surge as the national shutdown strengthens its hold on the U.S. economy.”

American Express, UnitedHealth and IBM fell more than 3% each to lead the Dow lower. Some of those losses were offset by Walmart, which turned around to close 0.7% higher after a report said the company’s sales have jumped 20% in the past month. Utilities and financials led the S&P 500 lower, falling 3.6% and 2.3%, respectively.

Stocks got a slight boost earlier in the day as oil rose 12%, adding to its biggest one-day rally on record. West Texas Intermediate futures soared 24% on Thursday for their best day ever, lifting the major stock indexes. The Dow and S&P 500 gained more than 2% on Thursday.

“Trends have now been sideways for US and European equities for the last seven trading sessions, despite the massive swings,” said Mark Newton, managing member at Newton Advisors, in a note. “Gains have consolidated, but have not given way to much weakness that is sufficient to expect an immediate test of low.”

Both the Dow and S&P 500 remain more than 26% below their respective all-time highs set in February as jitters over the spread of COVID-19 foster volatile trading on Wall Street.
Sinéad Carew of Reuters also reports that Wall Street falls as coronavirus cuts into U.S. payrolls:
Wall Street’s main indexes fell on Friday as the coronavirus abruptly ended a record U.S. job growth streak of 113 months, leaving little doubt that the economy is in a recession.

And even the loss of 701,000 jobs that Labor Department data showed for March did not completely capture the economic carnage. The survey considered data only until mid-March, before widespread U.S. lockdowns put more people out of work.

The worldwide spread of the virus has forced billions of people to stay indoors and pushed entire sectors to the brink of collapse, triggering mass layoffs and dramatic steps by companies to raise cash.

While relatively flat volatility indexes suggested that investors getting used to market swings, Mike Turvey, TD Ameritrade’s institutional senior trading strategist sees institutional investors taking a shorter term view with many still very cautious ahead of the weekend market close.

“This is not like December 2018. We’re not likely to see a V shaped recovery because we haven’t even begun to really tackle the main issue behind why this is happening. That’s still an ongoing process. It’s going to take time,” said Turvey.

“Everybody’s outlook has changed to very short term. The reality is that a lot of things happen over the weekend and a lot of people don’t want that exposure.”

The S&P 500 was down about 27% from its mid-February record high, or over $7 trillion in market value, and economists have cut their forecasts for U.S. GDP, with Morgan Stanley now predicting a 38% contraction in the second quarter.

At 3:00PM ET, the Dow Jones Industrial Average fell 365.26 points, or 1.71%, to 21,048.18, the S&P 500 lost 43.38 points, or 1.72%, to 2,483.52 and the Nasdaq Composite dropped 135.09 points, or 1.8%, to 7,352.22.

However the CBOE market volatility index , also known as Wall Street’s fear gauge fell 1.9 points. And while the small cap Russell 2000 index was down 4% on the day the Russell volatility index was essentially flat on the day.

“You have to interpret it as a small positive. You don’t see the same reach for protection,” said TD Ameritrade’s Turvey. “The market is accepting the fact we’re going to have these 3-4% swings on a regular basis.”

Of the S&P 500’s 11 major sectors utilities and financials were the biggest laggards with declines of more than 3%.

Walt Disney Co shares fell 3% after it said it would furlough some U.S. employees this month, while sources said luxury retailer Neiman Marcus was stepping up preparations to seek bankruptcy protection.

Analysts expect corporate profits to fall in the upcoming earnings season, but some strategists said that actual numbers will likely be given little importance.

“There’s really very little that you can take away from (earnings) other than some insights to actually how are these businesses set up to weather the pandemic and where will they be once it begins to show signs of passing,” Robert Pavlik, chief investment strategist at SlateStone Wealth LLC in New York.

Raytheon Technologies Corp, formed by the merger of United Technologies and Raytheon Co, shed 10.2% as it pulled its 2020 outlook for its aerospace units.
Alright, it's Friday and it was another dismal week on the health and economic front:

The most important thing this week is that coranavirus is slamming the US economy and the worst is yet to come:
The government’s survey of establishments painted a grim picture of the U.S. employment situation through early March, but its poll of households was far worse.

The household survey, which asks individual residents how many people are working there, showed a stunning drop of 2,987,000 workers for the month.

That compares with the nonfarm payrolls decline of 701,000 reported in the establishment survey and gives another perspective to just how bad the situation has gotten since the economy has all but shut down to protect against the coronavirus spread.

When releasing its headline nonfarm payroll numbers, the government focuses on the establishment survey as it captures a larger sample size and is considered less volatile than the household count. The establishment survey captures about 145,000 businesses and work sites, while its counterpart focuses on 60,000 eligible households and includes agricultural workers.

Both use the week up to the 12th of the month for sampling, which in this case was before the worst of the job losses began.

The Labor Department uses the household survey to calculate the headline unemployment rate, which jumped from 3.5% to 4.4%.

In the March survey, the household survey’s numbers are stunning.

They show a decline of employment from 158,759,000 in February to 155,772,000 in March. That came amid a drop of 1.6 million in the civilian labor force and a 1.1 percentage point tumble in the employment-population ratio to 60%. The labor force participation rate contracted 0.7 percentage point to 62.7%. Those counted as not in the labor force rose nearly 1.8 million to 96.8 million.

Other numbers showed a 1.2 million increase in job losers or those who completed temporary jobs. Those unemployed for less than five weeks surged by 1.5 million while those at work part time for economic reasons jumped by more than 1.4 million.
Given the massive job losses, it's hardly surprising some are warning to brace for the biggest recession ever and others are warning stocks have further to fall to new coronavirus lows:

Just how bad are things in the US right now? I think this says it all:

Small businesses are starving for cash to stay afloat, many of the people they laid off are counting on them but even when they reopen (if they reopen!), they won't be hiring everyone back until the economy picks up again.

We need to be realistic about what is going on, it's unprecedented economic destruction at a very rapid rate and there will be lingering economic effects.

Importantly, when times are bad, businesses respond immediately and cut, but when times are good, they take their time hiring people because they're uncertain and want to make sure the recovery is solid.

If the US economy can't escape a recession or worse, falls into a depression, what does that mean for stocks?

Well, it means we are going to be in for a bear market and that means two things:
  • Economists will take center stage again, not cheerleading Wall Street analysts/ strategists. 
  • Earnings visibility will be the name of the game, not conjured up earnings, real earnings.
Those of you who have never lived through a nasty bear market, let me sum it up for you: it's Chinese water torture.

Are we going into a bear market? No doubt about it, we’re already in one, we just have no idea how bad and how long it will last. How low will stocks go? Nobody really knows but some think a lot lower.

Veteran markets strategist James McDonald, CEO of Hercules Investments, continues to see downside risk to the Dow Jones Industrial Average to 15,000 from its current perch just above 21,000:
He thinks the economy could begin to show signs of life in the fourth quarter of this year — but until that starts to show up somewhere in the markets or economic data, he prefers putting on trades that profit from extreme volatility and downside.

Yahoo Finance highlights a call such as this because, well, McDonald has been dead right so far. Moreover, April has lived up to its billing in the early going as potentially lethal to stocks because of dreadful economic data nobody on Wall Street has ever seen before.

Also, if history is any guide, the relationship between earnings and the stock market will dictate just how bad this bear market will be:

When I look at the 5-year weekly chart of the S&P 500 ETF (SPY),  I see it can't break above its 200-week moving average and that tells me we are definitely at the beginning of a bear market and headed lower:

Just how low, again nobody knows but I warn you, just because the VIX index isn't making a new high, it doesn't mean stocks can't go lower over the coming weeks/ months.

Back in 2008, the VIX peaked in October 2008 and stocks made their ultimate low five months later in March 2009.

True, we have unprecedented global monetary and fiscal stimulus but when you look at unemployment skyrocketing in the US and all over the world, that doesn't provide much solace.

Anyway, I agree with those who think equities are taking a stroll through Wonderland, awaiting "herd immunity":

At one point, reality will settle in and it won't be pretty, so be prepared for a long tough slug ahead. If you don't believe me, believe this guy:

That doesn't mean there won't be tradeable opportunities, there will be like this week as oil stocks like Apache (APA) and Occidental Petroleum (OXY) surged along with oil prices, but I warn you, these are nothing more than bear market rallies.

How do I know this? I've been around long enough to tell you that this isn't the time to get excited about stocks, especially stocks that are popping from the abyss.

For the week, Energy stocks (XLE) outperformed all sectors, followed by Consumer Staples (XLP) and Healthcare (XLV):

Year-to-date, however, Energy (XLE), Financials (XLF) and Industrials (XLI) -- ie. cyclical sectors -- remain the worst performers by far. In fact, all sectors are down big and the only reason Staples (XLP) aren't down more is that people need to eat (typical bear market action).

And the pop in energy shares this past week might prove to be shortlived if OPEC doesn't strike a deal soon:

Lastly, it's been a long week, let me end with some important and hopeful information.

First, it might make sense to wear a mask, especially if you're venturing into crowded areas or if you're working with the public:

Second, US scientists think the Bacillus Calmette-Guerin (BCG) vaccine, administered to millions of Indian children soon after birth to protect against tuberculosis, could be a "game-changer" in the fight against the deadly coronavirus:

It looks promising but it's too soon to tell if this will be a game-changer. One medical expert shared this with me:
"It sounds great and easy to deploy but these are all ecologic studies (correlation patterns at a global level and not based on individual level data) which definitely would need randomized trial evidence even if correlations are strong. There are typically many other factors that could explain such correlations. For example, the high correlation between vaccination proportions and low mortality from SARS 1 and 2 could be a reporting issue if same countries do to track disease incidence and cause of death to the same degree. BCG vaccinations tend to be widespread in countries where the provision of health care is not optimal given TB is still endemic.

From a biologic perspective, one would have to assume that TB and this virus have some epitopes in common and the antibodies against TB induced by the BCG vaccine provide some cross immunity with coronaviruses that was previously not suspected/known. It sounds good but I don’t know how often cross immunity has been documented between viruses and bacteria. "
Anyway, I hope scientists discover something promising soon, we all need good news on this coronavirus.

Below, CNBC's "Halftime Report" is joined by Richard Fisher, former president of the Dallas Federal Reserve, to discuss his outlook for the US economy.

Also, CNBC's Kelly Evans talks with Larry Lindsey, former National Economic Council director, about his outlook for the US economy. Take the time to listen to Lindsey, he raises really important issues.

Third, Spencer Levy, CBRE head of research, joins 'Power Lunch' to discuss how the coronavirus pandemic will and is affecting the commercial real estate industry.

Fourth, Jim Chanos, Kynikos Associates founder, joins 'Fast Money Halftime Report' to discuss how to watch the stocks amid the coronavirus pandemic, how the gig economy will not scrape by unharmed from the outbreak and some of his stock picks.

Fifth, Mohamed El-Erian discusses how stock market could still touch new lows as uncertainty around the coronavirus pandemic persists. I completely agree, be very careful trying to pick bottoms in this environment. If a coronavirus depression forms, we haven't hit bottom yet.

Lastly, Nassim Taleb, New York University distinguished professor of risk engineering, says a "white swan" event like the coronavirus pandemic was preventable. He spoke with Bloomberg's Erik Schatzker on "Bloomberg Markets: European Close" earlier this week. Great interview, I agree with a lot of what he says.