May 28, 2020

Axios Markets

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🎙“There is no greater agony than bearing an untold story inside you.” - See who said it and why it matters at the bottom.

1 big thing: The economy's honeymoon phase

Illustration: AĂŻda Amer/Axios

Now that governors across the country have begun to pull back "stay at home" orders, businesses are facing a new set of challenges — consumers skittish about returning to normal activities and employees who aren't yet ready to come back to work.

What's happening: The Fed's latest Beige Book, a survey of business leaders around the U.S., was released Wednesday and revealed that for firms in each of the Fed's 12 districts, "the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery."

The big picture: While businesses are reopening, it's not as simple as flipping a switch, Scott Clemons, chief investment strategist at Brown Brothers Harriman, tells Axios.

  • "This is a process, not an event, and this is essentially a crisis of confidence so even when things reopen it's not certain that everyone will fully re-engage economically even if the governor says so."

State of play: The unemployment rate rose to 14.7%, its highest level on record, in April and many economists believe the real rate is well above 20%.

  • But bringing the millions of workers who are currently out of a job back into the labor force looks like it's going to be a more significant challenge than many expected.

What they said: "Contacts cited challenges in bringing employees back to work, including workers’ health concerns, limited access to child care, and generous unemployment insurance benefits," the Beige Book noted.

  • While the Paycheck Protection Program was cited as helping reduce labor turnover for some firms, others cited "challenges in meeting the PPP loan forgiveness requirement."

Between the lines: Many of the newly unemployed who are ready to get back to work won't have the opportunity.

  • More than half of small and medium-sized businesses in a recent study by Facebook in collaboration with the World Bank said they will not rehire the same workers they had before the crisis. 
  • And about a third of businesses that closed do not expect to reopen.

Where it stands: We are likely in the honeymoon stage of the economy's recovery, according to Harvard professor and former chair of the Council of Economic Advisers Jason Furman.

  • "Problem is, that's the low-hanging fruit of growth where you turn the lights back on [and] call some of the furloughed workers back," he told CNBC.
  • "There’s a lot more people that aren’t coming back to their jobs, businesses that are not going to be revived, and so once you get past that first phase, I think you’re in for a long and painful slog.”
2. Catch up quick

China’s legislature approved a resolution to impose national security laws on Hong Kong. (Bloomberg)

Overall, new coronavirus infections in the U.S. are on the decline as the number of deaths surpassed 100,000. But a small handful of states, mainly clustered in the South, aren't seeing any improvement. (Axios)

3. Airlines announce new coronavirus policies

Data: FactSet; Chart: Danielle Alberti/Axios

As air travel increases, many airlines are now offering options for travelers worried about social distancing on packed flights.

State of play: After previously packing customers onto full flights despite assurances that planes would be sold only to 50% capacity, American Airlines announced Wednesday it will alert travelers about crowded planes before their trips and allow them to switch to other flights.

  • The announcement follows similar measures from United, which alerts customers when flights are 70% full.
  • Delta said it plans to add 100 flights in June so its planes fly no more than 60% full.
  • JetBlue is leaving middle seats open unless families are traveling together on its Airbus planes through July 6.
  • Southwest said it will leave middle seats open on Boeing 737 planes through the end of July.

Why it matters: These are the strongest measures yet put in writing by airlines to help stop the spread of COVID-19 since the pandemic started.

  • Many airlines felt pressure from social media posts showing packed flights and legislators have weighed in seeking official social distancing mandates on planes.
  • Airlines also are trying to cope with massive revenue losses — American plans to reduce its management and support staff by about 30%.

The intrigue: Airlines have been highly favored by stock traders over the past two weeks, as more begin to anticipate a quick rebound in consumer demand for air travel as cities around the U.S. reopen.

  • JETS, the U.S. global airline ETF, has delivered about four times the S&P 500's return over the past two weeks, though it remains well below year-to-date returns.
4. Sports betting stocks are surging

Data: FactSet; Chart: Axios Visuals

Stock market bulls have raved about the success of supposed coronavirus-beating stocks like Walmart and Zoom, but in the past month few companies have delivered returns like sports betting giants DraftKings and Penn National Gaming.

What happened: Despite the lack of live games, sports betting stocks have performed particularly well, Axios' Jeff Tracy writes.

  • By the numbers: Since going public on April 24, DraftKings' stock is up 82%, while Penn National Gaming — which acquired Barstool Sports in January — is up 130%.

Why it matters: This surge signals a wider truth about the sports betting industry — it is uniquely suited to emerge from the pandemic virtually unaltered.

  • COVID-19 has plunged the global economy into a crisis, and some industries might never be the same (i.e. live events); but others, like sports betting, are poised to bounce back and essentially play the same role they did pre-virus.
  • To put it another way: We don't know when sports will return — or what they'll look like when they do — but we do know that people will bet on them.

Between the lines: As the world remains largely shut down and people are stuck at home with little to do, they're more likely to turn to the vices that satisfy their basest instincts.

  • "Gambling affects a primitive bit of the brain, a bit of the brain that, from an evolutionary perspective is less advanced and it's more about immediate gains," addiction specialist Cyrus Abbasian says.
  • The sports schedule may be limited at the moment, but bettors tend not to discriminate, and there could be more betting interest than ever when sports resume in full.
5. Many Americans don't know about mortgage deferral plans

The total number of home loans now in forbearance increased to 8.36% according the latest report from the Mortgage Bankers Association. That number could be higher but many Americans aren't aware they have the option.

What it means: Fannie Mae's latest national housing survey finds that only half of mortgage holders and just a third of renters know about relief programs, including the forbearance program now available because of the CARES Act.

Details: The survey finds that just half of mortgage holders understand what forbearance is.

  • One in three don’t understand what a loan modification entails. 
  • More than 60% of homeowners with a mortgage were unaware of any mortgage payment deferral offer from their lender.

Why it matters: The increase of borrowers in forbearance has slowed rapidly in recent weeks, but could pick up steam again once more borrowers learn about the programs.

  • That could provide an additional boost to the economy, but could also spell trouble for mortgage servicers and the mortgage-backed securities market.

The big picture: The current level of borrowers taking advantage of the forbearance program means that American consumers have $7.9 billion a month available to spend that otherwise might be going to a monthly mortgage payment, according to an analysis by Cowen Research Group.

6. Small caps are outperforming broader market
Data: FactSet; Chart: Axios Visuals

While still trailing the S&P 500 and other major U.S. stock indexes by a solid margin year to date, the Russell 2000 index, which consists of many of the country's smallest public companies, has outpaced the broader market's rebound since March 23.

  • The Russell 2000 rose 3.1% on Wednesday for its second straight day of gains over 3%.
  • The increase in small cap stocks shows investors growing bullish on the overall U.S. economy.

Thanks for reading!

Quote: "There is no greater agony than bearing an untold story inside you."

Why it matters: Globally revered poet Maya Angelou, who was born in 1928, died on May 28, 2014.