Morgan Stanley Misses On EPS, But Shows Strong Trading Results For Q1 As Banks Wrap Up

Any rally today will have a fight on its hands against a cascade of fresh dismal data.

Initial jobless claims of 5.2 million last week came in a little worse than analysts had expected, and housing starts fell out of bed in March with a 22.3% decline. That, along with weak earnings results from Morgan Stanley MS, is what the bulls will try to combat as the day continues.

Glimmers of Hope Amid the Ruins

Before getting hit with those atrocious numbers, stock futures showed some resilience heading into the opening bell. They mounted a comeback and traded slightly higher by morning after being down moderately early on. That follows yesterday’s steep losses in the regular session, which themselves weren’t as steep as earlier in the day as stocks bounced back a little from morning lows.

It’s a refreshing change from a month ago, when every turn lower got answered by tidal waves of selling. It suggests that some of the weak longs who fled the market when the pandemic first tightened its grip have basically been flushed out, and that buying interest can be found not too far down when the market has a hiccup.

Headlines about plans to start reopening the economy appear to be lending a little optimism, especially with the virus curve beginning to bend in some of the hardest-hit areas. The White House is expected to release a plan today for some initial reopenings, and countries in Europe are also making a little noise about getting things started.

Still, some experts say we need to have widespread testing available for that to happen, so let’s not get carried away. Especially on a day when Japan has declared a state of emergency, which is a little worrisome because that means the virus is still an issue in Asia. 

Big Bank Earnings Mostly Done, Shining More Light Into Crisis

The biggest bank earnings wrapped up today with Morgan Stanley (MS), and the bright spot was a nearly 30% jump in fixed income trading during Q1. Still, the company missed Wall Street’s consensus estimate by 13 cents on the bottom line, and said revenue fell 7.7% from a year ago, just missing the average analyst estimate. Like other banks reporting this week, MS put aside more funds to cover loans that might not get paid back. MS shares fell nearly 2% in pre-market trading.

The company set a grimmer picture of last month’s chaotic markets, confirming there were some liquidity issues at the height of that. The line that stands out from its press release is, “The credit deterioration within Institutional Securities was notable.” That might be giving some investors a little concern this morning. MS did say its financial condition is healthy and capital and liquidity remain strong.

Bank earnings this week really helped establish the severity of the crisis we’re in, especially when you see the huge war chests the banks have set up to cover against potential losses on loans. Drops in profit of 40% or more for some of the major banks definitely hit home and probably helped explain some of the disappointing action on Wall Street Wednesday. 

It’s also possible that a bit of consolidation is underway after the recent rally back from steep losses, along with renewed caution. You could see that by watching Wednesday as 10-year Treasury yields got slammed and the dollar rose. The 10-year yield is headed back down this morning, touching 0.61%, but arguably it’s found a range between roughly 0.6% and 0.75% over the last week or two. We’ll see if it can stay in there. 

Sentiment kind of changed over the last few days as earnings started to come in. Early in the week, the market was still hearing what it wanted to hear, whereas by Wednesday it was more like: ‘Here’s what’s actually going on.” 

That extends to the bearish data that got dumped on investors Wednesday, too. The jobless claims and housing numbers this morning only add to the mounting disappointment, while analysts also predict a soft leading indicators report tomorrow. That metric is expected to dive more than 7% in March, according to consensus estimates from research firm Briefing.com.

More Dismal Data

Way back in February 1946, monthly industrial production tanked as the U.S. eased off the gas pedal from its heavy wartime manufacturing. This March, the same metric fell 5.4%, the worst month since that time 74 years ago.

The manufacturing sector had displayed signs of trouble as far back as mid-2019, but the virus puts things in a whole new light. When you see numbers like this, you think of the potential negative impact for stocks across the Industrial, Materials, and even Consumer Discretionary sectors. People simply aren’t out there buying cars and washing machines, and that could reverberate throughout the economy. 

News wasn’t any better in the store aisles, gas stations, and restaurants last month. Retail sales data don’t go back to the post-war years, but they do go back to 1992. The 8.7% drop in March was the worst on record since the data started being collected, and even worse than the average Wall Street estimate. Grocery stores are seeing plenty of demand as people stock up on food, but things like clothing and furniture are gathering dust on the sales floors, and as we all know, restaurants and bars are doing what they can with take-out and delivery business. 

Shares of fashion retailer L Brands, Inc. LB took a 10% hit on Wednesday. Kohl’s Corporation KSS and Macy’s, Inc. M both dropped about 7%. McDonald’s Corporation MCD and Yum Brands, Inc. YUM fell sharply. Shares of Darden Restaurants, Inc. DRI—which runs a bunch of restaurants including Olive Garden and Red Lobster—have lost nearly half their value since the start of the year. 

Two Thumbs Down From Market on Crude Deal—So Far

A few days after that historic OPEC-plus-Russia crude production cut deal, the market’s reviews are in and they don’t look like four-stars. U.S. crude crumbled to close at a new 18-year low below $20 a barrel Wednesday and didn’t seem to find much buying interest as it went down (see chart below). It’s possible the weakness in crude—a function of soft demand, according to analysts—weighed on stocks to some extent, though it’s hard to say how much, or whether one is leading the other or vice-versa.

Energy is only a small part of the S&P 500—less than 4% on a weighted basis compared with 11% eight years ago—but its influence could be enough to help put the brakes on any rally. Having an entire sector of the economy under severe pressure definitely puts a pall over things, especially because so many energy companies are highly leveraged. This means their financial problems could trickle into a far larger sector—banking.

One reason banks came under pressure Wednesday was investors hearing financial executives say they might see loan losses continue to climb this year and even into 2021. It’s likely some of the companies unable to pay back loans could be in the Energy sector.

Defensive Names Back in Vogue as Broader Market Walloped

With stocks taking a blow Wednesday, that factor we mentioned last week about “safety stocks” getting a bid on bad days came back into play. As stocks plunged, shares of Clorox CLX, The Procter & Gamble Company PG outperformed the rest of the market. There’s nothing wrong with those companies and it’s not surprising to see people run toward them when they’re worried, but for the sake of the market as a whole it’s better right now to see cyclicals get more of a boost. 

Some cyclicals did get a little love Wednesday amid the carnage, but they tended to be the biggest, most well-capitalized ones like Microsoft Corporation MSFT and Amazon.com, Inc. AMZN. MSFT was up at some points before ending slightly lower, and Apple, Inc. AAPL also outperformed the SPX. The semiconductors, sometimes seen as a canary in the coalmine for economic demand as a whole, played defense Wednesday after flying much higher over the last few weeks. One day isn’t a trend, but could be important to continue watching this interplay in coming days to get a better sense of sentiment. 

Gold, meanwhile, has been trending up after a recent selloff. It appears to be getting some support from worries about the economy, as well as all the moves by the Fed recently that have a tendency to weigh on currencies. However, the dollar continues to hold up pretty well, with the dollar index recently trading at 99.48. That’s below recent nearly three-year highs, but above where it spent much of the last year or two. The greenback continues to find buyers who may be looking for “safety plays” in this financial crisis, though no investment is truly safe.

CHART OF THE DAY: CAN’T GIVE THIS STUFF AWAY. The oil market was under pressure even before the coronavirus pandemic hit. But the supply glut, combined with a steep slowdown among all facets of fossil fuel use, has pushed crude futures (/CL—candlestick) below $20 (blue line) for the first time since 2002. Data source: CME Group. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Ranges Narrow as SPX Support, Resistance Eyed: It feels like the market is trading in narrower ranges than it was when the sell-off started. The S&P 500 Index (SPX) failed to hold onto the Tuesday gains that took it back above 2800, but still finished Wednesday off its lows and down about 2%. It’s not a day anyone is likely to remember fondly by any stretch of the imagination, but those 5% and worse daily losses that got so common in late March seem to have retreated, at least for now.

Checking the technical picture, the bias could remain bearish if the SPX can’t get above a field of resistance between 2855 and 2882, research firm CFRA said in a report Wednesday. On the support side of things, holding above 2728 could signal that the bears are failing to get traction, CFRA said. Sometimes moving averages can also signal support levels, and the 50-day moving average is right around that 2882 level CFRA mentioned, making it a possible key resistance point. The closely-watched 200-day moving average is quite a ways above that at 3014. 

It might also be positive that despite Wednesday’s losses, the SPX finished above Monday’s closing level of 2761. That was roughly the intraday low on Wednesday and stocks bounced back pretty nicely. However, the Russell 2000 (RUT) small cap index, which more closely reflects the domestic economy, had a far worse day than the other major indices Wednesday and continues to lag. A recovery for the RUT might be one of the best signs investors can hope for as they look for evidence of optimism. 

Stuck in the Middle: It’s probably happened to all of us more than once at the airport. We glance at our seat assignment and sigh when we see it’s the middle one. Hopefully the people on either side aren’t as awful as the ones Steve Martin got stuck with in that old movie. Anyway, when it comes to the economy emerging from coronavirus, the “middle seat” analogy might come into play. As things start to open again, we might see restaurants get crowded and foot traffic return to malls and big-box stores. But the transportation companies might have more trouble cycling up, and it goes back to that middle seat. No one ever wants it, but when will anyone feel comfortable sitting there? When that happens, we’ll be able to say things are really back to normal. Anyone who thinks things will just rocket back right away should probably temper that and ask themselves if they’re ready to sit in the middle again.

Friday Follies: Look out. Since the start of the pandemic-related selloff, Friday has been the market’s least favorite day of the week, so get ready to potentially see some dramatic action, especially in the late going. The last hour of the day Friday has been a witching hour lately, as many investors look for cover going into the weekend. The theme typically this year has been fear of holding long positions prior to the two-day break, mainly because there’s so much fundamental uncertainty. Last Friday was a holiday, giving everyone a break from Friday’s typical volatility. 

Having said that, remember that stocks got a boost last Thursday (the final day of trading in a shortened week) ahead of the three-day weekend. At the time, that was seen as a vote of confidence in the market. Before that, the previous Fridays had seen SPX plunges of 1.5%, 3.3%, and 4.3%. Those numbers have been improving, as you can see, but it’s still been a month since the market had a “good Friday.” Back on Friday, March 13 (yes, a Friday the 13th), the SPX rose an amazing 9.2%. The kicker? It dropped 12% the following Monday.