Energy Stocks In Focus As Crude Oil Extends Rally, But Weak Employment Data Could Set the Tone

Jobs did a quicker-than-expected vanishing act last month as coronavirus tightened its iron grip on the reeling U.S. economy.

Job losses raced up by 701,000 in March, the government said Friday, and the unemployment rate rose to 4.4%, from 3.5% previously. This is pretty devastating data, considering analysts had expected just 100,000 jobs to be lost. It suggests things got worse far faster than most economists had expected.

A Granular Look at the Numbers

A huge chunk of the cuts were in leisure and hospitality, where positions fell by 459,000, mainly in food services and drinking places. Health care and social assistance also saw jobs disappear, which is a little surprising for health care when you consider the fight against the pandemic was picking up steam even by early March. It wasn’t too surprising, however, to see losses in professional and business services, retail trade, and construction.

One thing to keep in mind about the payrolls data is that it was collected in mid-March, so it doesn’t pick up all the economic carnage that happened later in the month. We’re only getting a partial picture of just how bad things got. The 701,000 number is ugly enough, but it might actually have been a lot worse when you consider the final two weeks of March didn’t get included.

The April and May reports are probably going to tell a fuller story as businesses and their employees  continue to grapple with this crisis. Remember, the 10 million initial claims picked up by the last two weekly reports happened in the final weeks of March. It’s probably fair to say the weekly jobless claims numbers have overtaken the employment report as the number to watch to get employment trends these days.

To put things in context, this dramatic monthly plunge in jobs comes after job growth averaged 196,000 per month in the previous 12 months. You have to turn back a lot of calendar pages to find the last payrolls report that showed job losses of 100,000 or more. It’s been nearly 10 years.

Monthly job losses regularly reached six figures in the teeth of the 2008-2009 Great Recession, so it’s not like this size of a loss never happened before. It’s just the speed of it that’s unprecedented. Back then, the economy had been slowing for months before things went really downhill. This time, it’s all turned around in about 45 days. 

Making things even worse was the government cutting its estimates for both January and February jobs growth by a combined 57,000. So even before the crisis hit, things apparently weren’t as good as people might have thought.

The dramatic rise in unemployment from 3.5% to 4.4% last month was the sharpest month-over-month increase since January 1975. The numbers can only tell a small slice of the story. The human tragedy of the virus and its impact on the economy and families is hard to measure, and it’s something investors haven’t really dealt with at any point in almost 100 years. We’re in new territory here, and it’s hard to say exactly how investors and the market might react.

Stocks shook off the last two weeks of record-high initial unemployment claims data, so you could argue some of the shock of Friday’s report was built in. On the other hand, few if any analysts were looking for a number this high, and it’s going to take a while to sink in.

If you’re trading in this market today, be aware that things could get volatile. That’s especially the case because today is Friday, and lately investors haven’t shown much enthusiasm about carrying long positions into the weekend.

If there’s anything positive to say, maybe it’s that the report picked up more of the job losses than analysts had expected, meaning fewer might spill into the April report. That one’s bound to be pretty terrible, either way, however.

Crude Party Pumped Up Stocks on Thursday

The story of the day Thursday was a record daily surge in crude oil futures, which at one point rose 30% on news that Saudi Arabia and Russia might make significant cuts in output. They ended the day up 24% and helped give stocks a lift after they might have gotten a little overdone to the downside the day before. 

Crude put on a burst early in the session, racing from $22 a barrel to $26 a barrel in just a few minutes after President Trump tweeted about the possible production slice. Some short-covering might have taken place then. The crude market continued to roll up new gains early Friday, climbing above $27.

If you’ve watched long enough, you know these kinds of political agreements often fall apart given enough time. So the crude situation could deteriorate. On Thursday, however, crude’s rally did help Energy stocks and the market overall. Some of the energy stocks getting a bid on the news included Exxon Mobil Coroporation XOM, Chevron Corporation CVX, and ConocoPhillips COP. In general, refiners have held on a bit better than others in the sector since this all started, as their margins tend to get helped by the extremely low crude prices. 

Crude might have given stocks an initial charge yesterday, but in the end, the major indices didn’t need crude. They managed to succeed on their own. That became evident late in the session when stocks rallied to near their highs for the day after the crude trading session ended. Stocks had sold off pretty good before that, but buyers came in to provide support. That’s a real positive, because with crude closed, the market could have just given in. Instead, a little resilience showed up.

Also, volatility continued to head south throughout both Wednesday (when stocks sold off) and again on Thursday (in a stock rally). It’s good to see the Cboe Volatility Index (VIX) back down near 50 again after topping 80 at times last month, because it’s potentially a sign that these crazy swings in the market might start going away. There’s no guarantee that more wild drops won’t happen, but a lower VIX signals that many market participants believe things are relaxing slightly.

Meanwhile, yesterday was the second Thursday in a row where stocks rallied despite a brutal initial jobless claims number. Overall, the rally in the face of terrible data was a little bit of a victory in and of the fact that it was a bad number and the market did kind of shake it off. Investors probably should be prepared for a lot more bad numbers.

Consider keeping an eye on the 10-year Treasury yield today. It’s back below 0.6% to start things off, not far off of recent lows. Readings here could be a decent barometer of peoples’ willingness to take more of a “risk-on” approach to trading. It was above 0.7% earlier this week. 

Can Crude Production Cut Steady Market?

The ultimate impact of a supply cut in crude isn’t possible to say now, and there’s kind of an analogy between what crude has done the last month and last year’s U.S./China trade war. There are so many parallels between the two, but the main one is that both are geopolitical situations that investors can’t control.

At some point, you have to think crude can come back, because people will eventually drive to work again. Many will likely relish the day they can go back to the office, and that could push up demand.  There’s also travel in terms of planes and ships, though some analysts say for the airline industry this is like Sept. 11 in terms of long-term impact. They reminded us that the airlines didn’t really get back to normal for a year after the attacks. Travel stocks got slammed again yesterday.

Energy, however, had a banner day Thursday and rose 9%. Financials were another leading sector as Morgan Stanley MS jumped 7%. It’s getting near earnings time for the big banks, and MS is the king of trading. It looks like hopes that the crisis might have boosted trading volume and revenue helped MS and some of the other banks yesterday.

CHART OF THE DAY: ENERGY PEEKS ITS HEAD ABOVE GRO

UND. Remember Energy? It's been lagging the S&P 500 Index (SPX—purple line)  for so long it's probably forgotten what sunlight feels like. But news that Saudi Arabia and Russia are taking steps to end their price war sent crude oil up more than 20% Thursday, and sending the entire Energy sector (IXE—candlestick) up 9%—far outpacing the rest of the index. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.  For illustrative purposes only. Past performance does not guarantee future results.

Checking in with the Fed: Last month’s unprecedented $2 trillion fiscal stimulus appeared to give the market a boost, but the economy might need more. That’s what Dallas Fed President Robert Kaplan told CNBC yesterday. Though the Fed handles monetary, not fiscal policy, he thinks Congress might want to consider providing another round to help keep things going through this crisis. It’s unclear if that’s happening anytime soon or at all.

On other issues, Kaplan cheered the news that Saudi Arabia and Russia are apparently about to cut oil production, but he noted there’s still a massive supply weighing down the market and that the U.S. oil patch could continue to struggle. He said any shutdown of crude operations in the Permian Basin of the southwestern U.S. won’t be easy to turn back on, if and when additional supplies are needed. It’s not the type of operation where you can flip a switch and have it immediately back at full steam. Shale producer Whiting Petroleum Company WLL filed for Chapter 11 bankruptcy this week. Its stock fell from $30 a share to 31 cents a share over the last year.

Unemployment Seen Peaking, Then Declining: The Fed’s Kaplan told CNBC he sees the unemployment rate coming back down by the end of 2020 after climbing into double-digits in the coming months. One figure he mentioned as an end-of-year possibility was 8%. Even that’s up from below 4% in February. How quickly the economy rebounds, he said, depends on how long it takes for people to start feeling more comfortable going about their normal, everyday lives when the crisis eventually recedes. More economists are saying this could take a while, because virus fears have grown so much among the general population that people might fear re-contamination even when they emerge from “sheltering in place.”

Like the rest of us, Kaplan and other Fed leaders don’t have answers regarding the virus. They don’t know how long this might last. But Kaplan indicated things could get worse before they get better. He noted that the U.S. workforce is about 160 million people, and roughly 10 million have filed initial unemployment claims in the last two weeks. The worst hit might be for small businesses, he said, which have less to fall back on than big corporations. And he noted that most U.S. jobs are created by small businesses. If many fail, the U.S. consumer—who makes up two-thirds of the economy—might not be able to come right back and power things up when this ends, because jobs could still be tough to find.

Home in the Range? You’ve probably read here that a potential sign of more stability in the markets—besides a drop in the Cboe Volatility Index (VIX)—would be if the S&P 500 Index (SPX) could find a trading range and stay in it for a while. It’s too soon to say for sure, but there’s a little more evidence that this could be happening. For instance, note how Thursday’s trading stayed pretty much within the range set in Wednesday’s session. When an index trades within a previous range, it’s sometimes a sign of the market settling down. And for what it's worth, the VIX did fall 11% Thursday—putting it a stone's throw from breaking the 50 level—something that hasn't happened since March 11.  

If you pull back further, it starts to look like a range between lows near 2200 and highs near 2600 has been in place for a few weeks now. Of course that’s still awfully wide, and some analysts think the market could test or even fall beneath the March intraday low of just under 2200. One extreme prediction that you can’t necessarily write off came from an analyst who said on Thursday that ultimately, the SPX might test 1800, the 2016 low, which would mean a more than 40% pullback from the highs. This wouldn’t be unprecedented, but arguably, the longer the market can stabilize in the range it seems to be carving now, the less likelihood of a massive downturn barring even worse news on the virus front.