Apr 9, 2020

Axios Markets

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🎙"He would probably say that if death had to come, I am sure there was no greater cause to die for than fighting to get a just wage for garbage collectors." - See who said it and why it matters at the bottom.

1 big thing: There will be vol

Illustration: Eniola Odetunde/Axios

The stock market continues to bounce back and analysts and investors are lining up on opposing sides of the market's big new question — whether stocks have hit the bottom.

  • The one thing they both agree on is that there will be significant volatility ahead.

On one side: The rebound from this recession may come at warp speed because the fall came at warp speed, Jim Paulsen, chief investment strategist at the Leuthold Group, tells Axios.

  • The extraordinary speed at which the market has sold off combined with the response from the Fed and government support could mean March 23, when the S&P 500 had fallen 33% from its previous record high to 2191, set the low.

What it means: In a typical recession, economic data slowly start to worsen and often the stock market reacts slowly to the evidence.

  • Only when enough data clearly convince everyone that a recession has arrived does the stock market ultimately suffer a major collapse, and policy officials finally reverse course with "aggressive shock-and-awe policies" to stop the bleeding.​
  • This year, by contrast, "The stock market did not do the normal bear market foreplay — it just went right to the end right away. So did bond spreads, commodities, real yields, and importantly, so did policies," Paulsen says.

On the other side: The damage from the pandemic and nationwide business shutdown is not yet quantifiable, and companies have provided no numbers to suggest that the hits they've taken to their earnings even justify the market being as high as it was on March 23.

  • There has been little in the way of positive economic data and the U.S. may already have lost all 20 million of the jobs the economy gained back during the 11-year recovery from the 2007–2009 recession, Alicia Levine, chief strategist at BNY Mellon Investment Management, tells Axios.
  • "This is an enormous, enormous blow that will take some time to recover from."

Plus, the market's 23% rise since March 23 is actually a contrarian indicator, Levine argues.

  • "Bear markets don’t end when everybody’s looking to buy the dip. Bear markets end when sentiment’s pretty negative and people are rushing out."

The big picture: Bullish investors are starting to dip their toes back into the market, bears are still expecting the worst, and sentiment is being wholly dictated by the latest developments of the coronavirus. That means big moves are likely to continue for some time.

Bonus chart: The VIX
Expand chart
Data: FactSet; Chart: Axios Visuals

The VIX, which tracks the stock market's expectations of volatility based on S&P 500 index options, has been consistently declining from the record high of 85 it touched on March 18 to just over 43 at market close on Wednesday.

  • But even the latest levels are historically high and around triple the market average for the past five years.
  • "The VIX at 45 is telling you that there are 2-3% swings every day," BNY's Levine says.
2. Catch up quick

Senate Majority Leader Mitch McConnell is expected to put legislation that adds $250 billion to the $350 billion small-business loan program to a vote today. (Politico)

President Trump said yesterday he wants to reopen the economy with a "big bang" but may do it in phases. Trump's chief economic adviser, Larry Kudlow, said Tuesday it was possible this could happen in four to eight weeks. (Reuters)

The minutes from March's emergency FOMC meeting showed members all agreed that the effects of the coronavirus would weigh on economic activity in the near term and that the duration of this period of weakness was "uncertain ... and unpredictable." (FOMC minutes)

The Fed will temporarily lift Wells Fargo’s growth restriction put in place after the bank’s customer abuse scandals, but said the bank has "not satisfied all of the requirements for removal of the asset growth restriction." (Axios)

3. Coronavirus is squeezing more people out of the housing market
Expand chart
Data: Federal Home Loan Mortgage Corporation; Chart: Axios Visuals

The $2.2 trillion CARES relief bill is helping existing homeowners but also causing dislocations in the U.S. mortgage market. This, combined with the coronavirus pandemic, is weakening access to and demand for mortgages even with rates at record lows.

Why it matters: In addition to the expected downturn in the housing market from nationwide shelter-in-place orders, the current shock is making it harder and more expensive for individuals, especially those with lower credit scores and less cash, to get a mortgage.

  • Growing purchases by corporate entities and investors over the past decade already have spiked prices and pushed many individuals out of the housing market.
  • The end result of the COVID-19 crisis may be that even more Americans are unable to buy a home.

What's happening: As a result of the CARES Act provision allowing delays in mortgage payments for borrowers with government-backed mortgages of at least 90 days and up to one year, forbearance requests are pouring in at an unprecedented rate.

By the numbers: Forbearance requests rose by 1,270% between the week of March 2 and the week of March 16, and another 1,896% between the week of March 16 and the week of March 30, MBA reported earlier this week.

  • Mortgage applications have decreased significantly in recent weeks, dropping 18% percent for the week ending April 3 from the prior week. Purchases rates fell by 33%.

What we're hearing: Many first time buyers and those with mortgages insured by the Federal Housing Administration or so-called high-balance or jumbo loans, "are going to see higher rates," Mike Fratantoni, chief economist at the Mortgage Bankers Association, tells Axios.

  • "And there is a point at which they’re just not going to be able to get a loan from nearly as many lenders as they would have three weeks ago."
4. How coronavirus threatens low-wage jobs

Data: LaborCUBE; McKinsey Global Institute analysis; Chart: Axios Visuals

Axios' Kim Hart writes: As many as one-third of U.S. jobs may be vulnerable as a result of the coronavirus pandemic, and it will disproportionately displace low-income workers that do not have the financial cushion to absorb the economic blow.

The latest: According to an analysis by McKinsey Global Institute, up to 86% of the vulnerable jobs paid less than $40,000 a year, and almost all (98%) of at-risk jobs paid less than the national living wage for a family of four ($68,808).

  • Almost 40% of the vulnerable jobs are in small firms with fewer than 100 employees, which are less equipped than big companies to weather the storm.
"It's quite striking how widespread the vulnerability is. This is going to be a workforce disruption larger than any of us have lived through."
— Susan Lund, McKinsey

By the numbers: An estimated 13.4 million vulnerable jobs are in the restaurant industry.

  • Another 11 million vulnerable jobs are in customer service and sales (including 3.9 million retail clerks and 3.3 million cashiers).
  • These are also the job categories likely to pay a median annual wage of less than $30,000, per McKinsey's data.

The potential job carnage spreads far beyond the service industry, affecting builders, transportation services, health aides, mechanics, social workers and some business and legal jobs.

  • "If we have 25 to 30% of people not earning income, it's a huge shock" to the economy, Lund said.

A separate Brookings Institution report found that the workers most vulnerable to job loss are those with a high school diploma or less. About half of low-wage workers are either primary earners or contribute substantially to paying family expenses.

Depending on the region, Brookings found between 30% and 62% of workers earn low wages — with median hourly earnings ranging from $8.40 to $12.65. (This interactive tool lets you drill down into metro area.)

Read more.

Quote: "He would probably say that if death had to come, I am sure there was no greater cause to die for than fighting to get a just wage for garbage collectors."

Why it matters: On April 9, 1968, Morehouse College president Benjamin Mays delivered the eulogy for Martin Luther King Jr., who had been murdered five days before in Memphis.

  • "He was supra-race, supra-nation, supra-denomination, supra-class and supra-culture. He belonged to the world and to mankind. Now he belongs to posterity."
  • "But there is a dichotomy in all this. This man was loved by some and hated by others. If any man knew the meaning of suffering, King knew."
  • "House bombed; living day by day for 13 years under constant threats of death; maliciously accused of being a Communist; falsely accused of being insincere and seeking limelight for his own glory; stabbed by a member of his own race; slugged in a hotel lobby; jailed 30 times; occasionally deeply hurt because his friends betrayed him — and yet this man had no bitterness in his heart, no rancor in his soul, no revenge in his mind; and he went up and down the length and breadth of this world preaching nonviolence and the redemptive power of love. He believed with all of his heart, mind and soul that the way to peace and brotherhood is through nonviolence, love and suffering."

Read the full eulogy.