Sunday, September 20, 2020

Stocks surge on one of the unhappiest days in American economic history: Here's why

May 09. 2020
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By The Washington Post · Thomas Heath · BUSINESS, US-GLOBAL-MARKETS

The worst unemployment report in American history screamed across computer and television screens Friday morning, announcing that a breathtaking 20.5 million Americans lost their jobs in April.

The next 60 seconds saw the Dow Jones industrial average jump, a 300-point pop that extended through the opening bell and into afternoon trading. The Standard & Poor's index 500, a broader indicator of corporate America, likewise surged roughly 1.4 percent.

Stocks held onto their gains and pushed them higher in the last hour. The Dow finished up 455 points, or 1.9 percent to 24,331, ending the week with a total gain of 2.4 percent. The blue chips closed above 24,300. The S&P 500 finished the day at a 1.7 percent gain, to 2,929, and closed the week up 3.4 percent.

The Nasdaq composite was up 1.5 percent Friday and nearly 6 percent on the week.

Wall Street often behaves counterintuitively, as its reaction to 14.7 percent unemployment can attest. But Friday's gains speak to investors' willingness to look beyond the economic wreckage wrought by the coronavirus pandemic. Here are seven reasons why:

1. The stock market is a future indicator, not a rear-view mirror.

Investors are betting on how companies will be performing a month from now, six months from now, even a year from now.

"Stock prices are based on expectations," said Howard Silverblatt of S&P Dow Jones Indices. "The current bad news was already baked in, as is more to come. But the longer-term hopes and expectations are for a reopening and corporate recovery."

The stock market has been one of the best real-time measures for gauging what investors are thinking. The S&P 500 index is a reliable indicator of future performance for America's 500 largest companies. Its role as a business indicator is based on the collective wisdom of millions of investors who are wagering tens of billions of dollars a day based on untold bits of available information. The efficient market theory, as it is known to its adherents, holds to the belief that the market prices most stocks correctly, based on the information available.

2. Technology stocks are killing it.

Tech giants Amazon, Apple, Google-parent Alphabet, Microsoft and Facebook have been on a serious tear for years and are behind a big chunk of recent gains. Microsoft shares have jumped 17 percent and Amazon has soared 28 percent since the start of the year. Facebook, Apple and Alphabet's gains are hovering near 3 percent.

The five stocks comprise 21 percent of the S&P 500. They have lifted the Nasdaq composite into positive territory in 2020 even as the coronavirus pandemic has devastated the economy. (Amazon founder Jeff Bezos owns The Washington Post.)

"These are the stocks that have empowered the economy and have been the job-creation engines," said Ivan Feinseth of Tigress Financial Partners. "They are enabling people to work at home. Investors realize the value they provide and they create and believe they will continue to be successful. Like it or not, Facebook kept people who are isolated from being alone."

3. There's hope on the health front.

Despite the pandemic's terrible toll - 76,000 American deaths and climbing - the global pharmaceutical industry has massed its resources to laser focus on finding vaccines and treatments.

Johnson & Johnson, Pfizer and biotech company Moderna are among the companies racing to find a vaccine.

The Food and Drug Administration signed off this week on Moderna launching the next phase of testing on its coronavirus vaccine candidate. The company began its testing on 45 healthy adults in March, becoming one of the first companies to begin human clinical trials for a covid-19 vaccine.

Gilead Sciences reported "positive data" in a clinical trial by the National Institute of Allergy and Infectious Diseases for remdesivir, another possible treatment.

The trial showed that "a drug can block this virus," Anthony Fauci, director of the institute, said in a news conference Wednesday.

The hardest hit states of New York, New Jersey and Connecticut have reported progress against the disease, with deaths, infections and hospitalizations down from their peaks weeks ago. While the disease is spreading in other parts of the country, hospitals do not appear to be overwhelmed with virus victims.

Goldman Sachs published a report this week that shows improvements around the globe but some mixed results in the U.S. as more states relax their lockdowns and businesses begin to open.

"The new information on the coronavirus has improved in Europe but has turned a bit worse in the U.S. relative to expectations on average over the past two weeks," Goldman said in its report. "Compared with the recent trend, the current number of new infections has been broadly stable globally on net. This reflects further declines in Europe, very few new cases in China, roughly stable but elevated gains in the U.S. and further rises in emerging markets."

Ed Yardeni, president of Yardeni Research, said "there are some signs of success on the health front. The market is looking at the rate of change of virus cases and deaths, and it doesn't look like its getting worse. The market is expecting it's going to get better as it has in China and in Italy. It is extrapolating from those countries' experience."

4. Oil markets are calming down and prices are rising, which is good for a key industry.

The price of oil is not where it needs to be, but it is going in the right direction for producers. U.S. crude oil is back near $25 per barrel and Brent crude, the international benchmark, is up near $30.

Producers need $50 or so per barrel to make money, but current prices are far better than they were just a couple of weeks ago. Holders of U.S. crude were paying people to take oil off their hands last month.

There is still a massive oil glut, but with the U.S. shale industry shutting down wells at a swift rate, the balance between supply and demand is getting close. The U.S. pumped 13.1 million barrels a day a few weeks ago. Now it is closer to 12 million and heading south. Meanwhile, drivers around the world are slowly getting back on the road. Gasoline usage is still down 30 percent from pre-virus levels, but it has improved from the 50 percent decline in March.

"The oil price stabilization and rise is a ray of light that we are getting through this economic darkness," said John Kilduff of Again Capital. "It's clear there is pent-up demand waiting to be unleashed, and we are seeing that in the rebound in gasoline numbers toward normal levels."

5. The Federal Reserve and the U.S. government have flooded the economy with trillions in cash and easy credit.

Investors have credited the central bank with saving the markets from collapse and preventing a new financial crisis from making the recession worse. As trading seized up in March amid the initial panic, the Fed swiftly launched plans to buy massive quantities of government, corporate and municipal bonds.

The Fed is launching a program to lend directly to Main Street businesses that fall in the crack between financial markets and existing small-business programs. But the unusual effort is only getting started.

"The Fed went from bazookas that had mostly run out of ammo and skipped helicopters and went straight to the B-52s carpet bombing tons of cash on the financial markets and the economy," Yardeni said.

The super-low interest rates promulgated by the Fed have sent investors out of bonds and running to equities in search of returns, helping raise stock prices.

The Trump administration launched an unprecedented small-business loan program designed to prevent companies from laying off their workers, part of nearly $3 trillion Congress approved to counter the pandemic's medical and economic toll.

6. The U.S.-China trade war truce looks like it may not unravel, which is good for the economy.

U.S. Trade Representative Robert E. Lighthizer and Treasury Secretary Steven Mnuchin on Thursday held a conference call with Liu He, China's vice premier and point man on the trade deal, to make sure the "phase one" agreement was on track.

Trump has said he is unhappy with China, which he has held responsible for allowing the virus to take hold and spread. Secretary of State Mike Pompeo pointedly criticized the Chinese for its role in the virus, raising fears of retaliation. But more than 30 million unemployed, many economists say it would be a bad idea for the administration to engage in a trade war.

7. Shanghai Disneyland has sold out.

Disney said tickets to it's park in Shanghai, which opens Monday, sold out in minutes. Although the park will only admit 30 percent of it's capacity, peoples' appetite to get out and spend money bodes well for the U.S. Disney is looked at as a model for crowd control, so hospitality and entertainment companies will watch closely.

 

 

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