Staking Claims: A Record 6.6 Million Workers Applied For Unemployment, Doubling Estimates

A brutal, punishing initial weekly unemployment claims jump to 6.6 million last week sets the stage for Thursday’s trading. That’s double what analysts had been expecting, and topped even some of the highest estimates on Wall Street.

For the workforce, it’s a devastating sign of the pain this crisis is putting on employees, businesses and the U.S. economy. It’s the second record-breaking week in a row, with the old high mark for weekly initial claims before this year being well below a million. 

The question is whether this is a temporary spike or if it can last week after week. Some analysts suggest next week’s report might be more important, because it can help answer that question. If they’re right, then what we’re seeing now is simply a shock to the system, a surge that might fade quickly.

The number is ugly, there’s no getting around it. Stock futures were up before it came out but quickly surrendered their gains following the news. Strength in the oil market had been underpinning a rally in stock index futures prior to the claims news.

Volatility Check

Claims aside, volatility is headed down this morning. The heavy volatility is probably going to continue. These are huge ranges the market’s been trading in and that doesn’t end right away, but what many investors probably want to see is more of what we’ve been seeing: Staying within 100 points on the S&P 500 Index (SPX).

That sounds crazy, because before this started, 100 points was considered a wild swing. What’s important, though, is seeing the ranges narrow day-by-day, week-by-week so that the market gets back in a position where you can point to support and resistance levels and start seeing more predictable patterns develop.

Crude shot up 10% early Thursday after President Trump said he wants to talk to the leaders of Saudi Arabia and Russia about how to stabilize the market. Also, China said it’s going to start buying crude at cheap prices for its strategic reserves. This could be good from the short-term perspective of giving crude prices a lift, but also longer-term because it suggests China sees its economy recovering and more need for energy down the road. 

Walgreens Boots Alliance WBA shares rose in pre-market trading after the Dow Jones Industrial Average ($DJI) component beat analysts’ estimates with its earnings results. However, in what could be a sign of more things to come, the company said it can’t predict the impact of coronavirus and is holding off guidance until next quarter.

Maybe that’s something to expect from a lot of companies once earnings season gets underway, but that could be disappointing to many investors who’d hoped executives could provide at least some kind of outlook on what might be ahead. The problem is, nobody knows how long this situation lasts, so you can’t fault companies for wanting to wait and see. 

Tough Comparisons

How bad of a start has the year gotten off to? Well, it’s the first time since 2008 that a year began with three negative months for the SPX noted Sam Stovall, of research firm CFRA. The most recent year before that to begin with an unfortunate “three-peat” was 1982, and it’s only happened seven times since World War II. The average full-year price return for years like that was -14.8%, though past performance doesn’t necessarily tell us about the future. 

From a sector perspective, the first three months of 2020 offer investors a good lesson about not putting all your eggs in one basket. Losses since Dec. 31 are as low as 12.2% for Information Technology and 13.1% for Health Care to as bad as 51.1% for Energy and 32.3% for Financials. Other sectors down less than 20% so far this year include Consumer Staples, Utilities, Communication Services, Real Estate, and Consumer Discretionary.

The SPX, factoring in Wednesday’s plunge, is down almost 24% year-to-date, which is bad enough. The Russell 2000 Index (RUT) of small caps has really taken it on the chin, though, with a year-to-date loss of almost 36%. More below on why the RUT may be getting hit hardest.

It’s getting harder to believe there could be a “V-shaped” recovery for markets and the economy, by the way. Even if this crisis ended tomorrow, people wouldn’t necessarily be hopping onto cruise ships or airplanes immediately. Business meetings wouldn’t go right out of conference rooms and into convention centers. It’s difficult to believe things could get back to normal right away when the situation is over, because there would still probably be concern about reigniting the virus or being in close quarters with lots of people. 

Another challenge to any prolonged rally is the way the Financial sector has been beaten down. It’s one of the worst-performing sectors this year, dealing with a one-two punch of low rates and a business slowdown. Without that sector recovering, it will be hard to have a “V-shaped” scenario. The old saying is it’s hard to rally without Financials participating, because they’re really at the center of so much business activity. 

Yesterday we mentioned The Kroger Company KR and The Clorox Company CLX as potential contrary indicators, meaning if their stocks do well it might suggest more fear around Wall Street. It’s not really too surprising, then, that both stocks continued to gain Wednesday as the broader market lost ground. There’s nothing wrong with those two companies, but if you’re a bull you’d probably be happier seeing big gains for the more cyclical stocks in sectors like Information Technology and Consumer Discretionary.  That’s where investors tend to put their money when they’re feeling confident. 

Bonds also rose rapidly the last two days, wiping out some recent yield gains. That’s another signal investors might want to follow, because buying bonds tends to indicate a more cautious mindset. The 10-year yield fell back under 0.6% at times Wednesday, which likely helped weigh down the Financial sector. It did scratch and claw back above 0.6% by day’s end. 

A Look Back at Wednesday—For Those with Strong Stomachs

Looking back at yesterday, things were ugly, but some positive signs are out there like little green buds on the trees. First, there was no dive to limit losses for the SPX, the way we saw a couple of weeks ago.

Meanwhile, crude recovered throughout the day and stayed above $20 a barrel. The 10-year Treasury yield managed to find a little life after falling below 0.6% early on.

All that said, uncertainty remains sky-high, and when investors don’t know what’s next the first reaction is often to sell stocks and buy what they see as risk protection in fixed income and volatility. 

A lot of investors want to know if major indices are going to retest the lows. No one knows, but the fact that VIX is staying down near more normalized levels (relatively, anyway) could hint that this down-move is maturing. Investors seem to be absorbing bad news with less fear and not reacting like before. Things could turn more negative, but the way the market is reacting to new data could be a stronger argument that recent lows might hold.

CHART OF THE DAY: QUARTER PLUS ONE: This chart covering Jan. 1 through April 1 shows the performance of three major indices: The S&P 500 Index (SPX—candlestick), the Russell 2000 Index (purple line–RUT), and the Nasdaq (blue line—COMP). It’s quite evident that the technology-heavy COMP has been an outperformer while the RUT—made up of smaller companies and heavily weighted toward regional banks—has suffered most. Data Sources: FTSE Russell, Nasdaq, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.  For illustrative purposes only. Past performance does not guarantee future results.

How to Determine Value Here? It’s Complicated: One confusing challenge that’s likely added to recent wild market swings has been finding a way to value stocks as earnings suddenly stand on shaky ground. That makes it hard to put a number on 2020 earnings per share (EPS) for the S&P 500, but many analysts now seem to think no growth from a year ago or even a steep decline in earnings could be likely. Originally, the average estimate had been for mid- to upper-single digits 2020 growth in EPS. If EPS is ultimately seen falling sharply from 2019, there could be more room lower in the SPX from a valuation standpoint.

Dueling P/E Ratios: If you want to stress the positive, you could note that at the current SPX level, and assuming unchanged 12-month forward EPS year-over-year in 2020, the SPX has a price-to-earnings (P/E) of around 15. That’s near historic averages and down from nearly a 20 P/E at recent all-time highs, which many analysts thought looked pricey at the time. However, the less rosy projections could signal more pain for the market if they end up becoming reality. If you plug in the lowest Wall Street forward earnings per share estimates for 2020—which see 35% declines from a year ago—the current SPX P/E ratio would be well above where it was two months ago. So a lot depends on the crisis not lasting long enough to punish earnings more than they’ve already been, and for a recovery to shape up starting in Q3.

The timing of the presumed recovery isn’t possible to estimate right now because that’s up to the virus and science. However, one analyst speaking on CNBC yesterday said earnings season will possibly provide some hints. Investors are likely to discount companies’ January and February numbers because that was before the virus hit the economy. If companies provide a monthly breakdown, however, and detail their March performance specifically, it might allow analysts to get a handle on how bad things have gotten under virus conditions. That in turn could give them more clarity on how earnings might proceed in Q2 if the current economic regime continues.

Corporate Bond Desk: It’s important to monitor how long and severe the downturn ends up being, because that will potentially affect the number of defaults in the corporate bond space. If defaults start to mount, that could make the recovery a bit more of an uphill fight. A number of ratings agencies are starting to put out warnings about bond issues, so consider keeping an eye on that. 

If defaults pick up steam, one sector that could suffer is Financials. Specifically, regional banks might be at the most risk. Yesterday’s steep losses in the Russell 2000 Index (RUT) of small-caps could be one indication of how badly small businesses are suffering in this crisis, and that’s particularly worrisome for regional banks (which make up a decent percentage of the RUT). If smaller banks and non-bank lenders stop lending, it’s possible it could start bleeding into the bigger banks and the bigger indices as people really start getting hurt in terms of paying their bills.