Apr 21, 2020

Axios Markets

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🎙“If a thousand lives I had, a thousand lives I would give for the liberation of my homeland.” - See who said it and why it matters at the bottom.

1 big thing: The stock market's demand disconnect
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Data: FactSet; Chart: Axios Visuals

The contrast between moves in oil prices and U.S. stocks has been stark. Even before Monday's once-in-a-lifetime fire sale in oil, crude prices had priced in at least some of the massive demand drop in the market while stock prices had recovered to their April 2019 level.

Why it matters: Stock prices are not reflecting the value of companies and the S&P 500 could fall hard and fast, in a miniature version of Monday's oil rout (when WTI crude futures fell from $17.85 a barrel to -$37.63) after a 25% rally since March 23.

  • Even with what Morgan Stanley analysts estimate has been an $11 trillion response to the COVID-19 outbreak by Congress and the Fed ($8 trillion from the Fed and $3 trillion from Congress), it's hard to imagine companies have a value almost equivalent to what they had in April 2019.

Driving the news: This week is likely to bring another round of horrific economic data and poor corporate earnings, Bank of America Global Research analysts note.

  • After last week's earnings bloodbath, when about 14% of S&P 500 companies unveiled their numbers, first quarter earnings per share estimates have fallen by an additional 5%, implying a 15% decline year over year. (Energy company earnings estimates are down 40% since the start of April.)
  • So far, 20 companies have suspended dividends and 60 have suspended buybacks, which were major sources of EPS growth in 2019.
  • Yet stock prices rose and credit spreads tightened last week.

The big picture: The market is responding to improved expectations about when the coronavirus pandemic will peak in the U.S. and worldwide.

  • “The question is, are markets underestimating this (virus) in terms of the long-term impact on the economy," Rabobank head of macro strategy Elwin de Groot told Reuters.
  • "There will be damage and there will be damage in terms of the consumer psyche."

Case in point: A survey from Bankrate.com shows 62% of U.S. adults have canceled plans or no longer plan to attend upcoming events because of COVID-19.

  • "This includes celebrations such as a wedding or graduation party (31%), hotel stays/lodging (27%), flights (23%), concerts (18%), sporting events (16%), live theater (14%) and something else (12%)," the survey found.
  • Of those who canceled plans, 37%, or around 59 million people, lost money and only 30% of them have or will receive a full refund.
Bonus chart: What happened to oil
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Data: FactSet; Chart: Axios Visuals

Axios' Amy Harder writes: Coronavirus-fueled lockdowns around the world are choking off oil demand, throwing the oil industry — which was already oversupplied before the pandemic — into historic chaos.

  • An equally historic production cut of the world’s biggest producers likely delayed the drop in oil prices we saw yesterday — and made it a tiny bit less bad.
  • Prices are likely to keep dropping, or at the very least remain very low, for at least the next few weeks given there is simply not enough places to store all of the extra oil sloshing around the world as many of us stay at home.

Where it stands: The price of oil makes up more than 50% of the price of a gallon of gasoline, but it takes several days for changes in the global oil market to make it onto gas stations’ billboards.

Double bonus chart: The economy, excluding financial indicators
Data: New York Federal Reserve; Chart: Axios Visuals

The New York Fed will update its index of 10 daily and weekly indicators of real economic activity, scaled to align with the quarterly GDP growth rate, today at 11:30am.

What it means: The weekly economic index "represents the common component of ten different daily and weekly series covering consumer behavior, the labor market, and production."

  • "The WEI is scaled to the four-quarter GDP growth rate; for example, if the WEI reads -2 percent and the current level of the WEI persists for an entire quarter, we would expect, on average, GDP that quarter to be 2 percent lower than a year previously."

Of note: Unlike the Conference Board's index of leading economic indicators, the WEI doesn’t include any financial variables, like the S&P 500 or the Treasury yield curve.

Between the lines: The WEI has held around 2% since 2010, largely in line with U.S. potential GDP and real year-over-year GDP growth, but has been plummeting since Feb. 29, when it was 1.6%.

  • During the Great Recession, the WEI only dropped to around -3%.
  • Debbie Johnson, chief economist at Yardeni Research, estimates that the latest reading translates to a -48% quarter-over-quarter decline for real GDP growth in Q2.
2. Catch up quick

President Trump says he plans to temporarily suspend all immigration to the U.S. through an executive order. (The Hill)

A number of states are asking the federal government for interest-free loans to cover unemployment payments as almost half have seen double-digit percentage declines in their trust-fund balances since the end of February. (WSJ)

3. Reality check: How many big companies got PPP loans

Data: U.S. Small Business Administration; Table: Axios Visuals

As Congress pushes closer to extending a second round of relief payments to small businesses after its $350 billion Paycheck Protection Program ran out of funds in two weeks, banks are facing severe backlash over their handling of the program.

Driving the news: A class-action lawsuit on behalf of small business owners alleges JPMorgan, Bank of America, Wells Fargo and US Bank prioritized larger loan applications over small ones in order to collect larger processing fees.

Yes, but: While much of the program's total amount went to companies who were able to show their operations needed $1 million or more in assistance, suggesting they were hardly small businesses, nearly three-quarters of the total loans given out were for under $150,000.

  • Almost nine out of 10 PPP loans (87.5%) were for less than $350,000, reports from the Small Business Administration show, a number that grew steadily in the final days of the program.

What's next: Banks are warning their customers that even if Congress provides an additional $300 billion by this week, they may not be able to provide loans to small businesses. They say the program needs closer to $1 trillion to meet demand, according to Politico.

  • A survey from the National Federation of Independent Business found that only about 20% of small businesses that applied for a PPP loan had money deposited in their account as of April 17.
4. Too risky to go back to "normal"
Data: Ipsos/Axios survey, margin of error of ±3.3 percentage points; Chart: Andrew Witherspoon/Axios

Axios' Margaret Talev writes: Most Americans feel it would be risky to return to "normal" life just yet, and would wait indefinitely or at least for a few more months for the threat of coronavirus infection to subside, per the Axios-Ipsos Coronavirus Index.

Why it matters: President Trump has championed the idea that some states should reopen by May 1. But the latest findings from our national poll suggest most Americans aren't ready and worry it would hurt their health and well-being.

The results also suggest that the recent protests in Michigan and elsewhere against stay-at-home orders — which have drawn national press coverage — don't reflect how the majority of Americans think about the response to the virus.

Read more

Editor's note: I tried to get cute in yesterday's newsletter and wrote that the Fed serves at the pleasure of the president in the first story. That is incorrect and I apologize for any confusion.

  • From a reader, who also happens to oversee media relations for the Fed: "The president appoints Board members and they are approved by the Senate, but ... they can’t be removed at the pleasure of the president. The Board is structured to give it independence. Board members have 14 year terms. The chair has a four year term."

Quote: "If a thousand lives I had, a thousand lives I would give for the liberation of my homeland."

Why it matters: On April 21, 1792, Tiradentes, or Joaquim José da Silva Xavier, was hanged, drawn and quartered for his role in the movement for Brazilian independence from Portuguese imperialism. He became a symbol of the movement and is viewed as a national hero of Brazil.