New Dawn: Week Begins With Optimistic Tone Amid Positive Signs From Europe, New York State

There’s the old saying that it’s always darkest before the dawn.

As today’s trading dawns, investors seem to be more optimistic this morning as they may be sensing signs of a turnaround in the global coronavirus pandemic.

Market participants seem to be seizing on slowing death rates in Europe and optimism from the White House that, although the worst is likely not yet behind in the United States, that turning point may be coming. 

New York State, which is the national epicenter of the disease, saw the number of new COVID-19 fatalities decline on Sunday, marking the first time the number of deaths had dropped since the outbreak began.

And James Bullard, the president of the St. Louis Fed, sounded an optimistic note on the economy over the weekend, telling CBS that universal testing is a solution that would help the economy get back on its feet by enabling more in-person interactions among those with negative results.

In the oil market, which has been hard hit from worries about demand from a weakened global economy, prices were lower on news of a delay in a key meeting between OPEC and its allies, reversing gains that had come last week on expectations of an announcement of a production cut earlier this week.

Sharp Contrast from the End of Last Week

The first half of the overnight rally was a reversal of Friday’s selloff. Stocks had ended the week on a sour note as payrolls and unemployment data came in well below expectations, the COVID-19 death toll continued to climb and the $350 billion small business loan program got off to a very rocky start. 

The government’s small business loan lifeline aims to help keep mom-and-pop businesses, and medium-sized enterprises, afloat while customers stay away but bills keep coming in. It’s a great concept, but sometimes with programs this large there can be hiccups. 

As banks scrambled to deal with the deluge of loan seekers, the COVID-19 death toll spiked in the nation’s financial center and epicenter of the domestic pandemic. New York’s governor said the state had seen the single deadliest day since the outbreak began.

To try to stem the tragic loss of life, many people have been ordered to stay at home as bars, restaurants and other businesses have been shuttered, hitting the economy hard. Friday’s jobs report turned out much worse than expected. Job losses jumped by more than by 700,000 in March, and the unemployment rate rose to 4.4%, from 3.5% previously. A Briefing.com consensus had expected much less severe losses of 150,000, and a smaller jump in unemployment to 4%.

Selling Pressure Abating

Still, even after that huge number of job losses, and the reality that the report didn’t capture all of the payroll declines during the month, each of the main three U.S. indices lost only around 1.5%. In pre-coronavirus days, those would be considered pretty hefty losses. But the market in recent days, while still seeing elevated volatility, the daily range of the S&P 500 Index (SPX) has decreased from what we saw during the heavy selling from mid-February to mid-March.

It can be argued that losing just 1.5% after news of the worst employment report since the financial crisis could be another sign that traders and investors have worked through much of their selling impulse and that stocks may have reached some sort of an equilibrium unless we get more big coronavirus news— either good or bad. 

Stocks have also tended to be under pressure on Fridays as investors seem to not want to take on as much risk over the weekend because of the potential for market-moving news on Saturdays and Sundays.

This Week in the Economy

This week’s economic calendar is relatively light, which is probably just as well because that means it contains fewer reminders of how bad things are getting because of the COVID-19 lockdowns.

There aren’t any major economic reports on Monday or Friday. Meanwhile, investors are scheduled to see job openings and consumer credit reports tomorrow, a mortgage applications index and the U.S. government’s weekly report on crude oil inventories on Wednesday.

Thursday’s calendar includes a producer price index for March, weekly jobless claims—which have ratcheted up in importance as the coronavirus continues to hold the economy hostage—and the University of Michigan’s preliminary consumer sentiment index for April.

With the relatively light week in economic data, coronavirus-related headlines may take on even more importance as market drivers in coming days.

CHART OF THE DAY: VIX EASES: Volatility is still quite a bit higher than what it was prior to the coronavirus outbreak, but it’s definitely been coming off. The Cboe Volatility Index (VIX) actually fell on Friday, despite a terrible jobs report, continuing COVID-19 deaths and confusion about the government’s lifeline to small businesses. Monday's premarket rally in the major indices could help the VIX continue its march down toward what could be a "new normal." Chart source: Cboe Global Markets. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Weekly Versus Monthly: When it comes to the rearview mirror that is the monthly payrolls report, it’s probably a case of “objects in mirror are worse than they appear.” That’s one reason that the weekly jobless claims figures have become so much more important to Wall Street as they provide a more up-to-date gauge than the monthly government figures. Last week’s initial claims—for the week ended March 28—came in at an astonishing 6.648 million when a Briefing.com consensus had expected 2.8 million. The newest figure marked a sharp jump from the prior week’s upwardly revised 3.341 million. As the market looks for milestones to gauge when the worst economic damage might be over, a decline not only in initial claims but also in continuing claims might be good places to look. 

Unemployment May Be Much Higher: Because the payrolls report didn’t include all of March, it seems likely that the 701,000 figure for lost jobs and the 4.4% for the unemployment rate will both be revised higher. Briefing.com noted that the latest jobless claims figure, discussed above, wasn’t included in the monthly data and said that the unemployment rate is likely closer to 10%. The monthly jobs report “still isn't adequately capturing the full extent of the weakness in the labor market,” Briefing.com said. “Things are even worse than the headlines here suggest, as (Thursday’s) initial claims report made abundantly clear.”

DAL Earnings Coming Up: Investors might want to pay attention to Delta Air Lines, Inc. DAL results, which may come later this week. DAL has been one of the airlines hit hard amid the coronavirus-led plunge in travel. It could be interesting to see if company executives give an outlook for how long they think their company could be under such duress and how much, if any, of the government bailout money the company will seek. If there’s been one silver lining for the airlines stemming from the pandemic, it’s that oil prices have plunged on worries about global demand, and oversupply fears linked to Russia and Saudi Arabia. Lower oil prices mean the carriers have to pay less to fly passengers and cargo around the globe. But that’s probably little consolation given that demand from passengers is so low.