Apr 30, 2020

Axios Markets

Good morning! Was this email forwarded to you? (Today's Smart Brevity count: 1,216 words, < 5 minutes.)

🎙 "It’s not fair to feel proud of lineage. You are all about your karma." See who said it and why it matters at the bottom.

1 big thing: Microsoft's strong earnings give stock bulls more ammo

Illustration: Aïda Amer/Axios

Microsoft delivered the goods in its earnings report Wednesday, announcing increased profit and sales that not only beat analysts' expectations but showed the company could continue its impressive growth trajectory in the face of the coronavirus pandemic.

Why it matters: The impact of Microsoft's strong earnings is magnified by the fact that it is one of the five Big Tech companies that account for around 20% of the entire S&P 500's market cap — along with Apple, Amazon, Alphabet and Facebook — the index's highest level of concentration since the 2000 tech bubble.

  • With Microsoft's solid fundamentals and a mountain of fiscal and monetary money from the Fed and Congress, traders have more cover to keep looking past the economy's escalating deterioration.

What they're saying: “In the third quarter of fiscal year 2020, COVID-19 had minimal net impact on the total company revenue,” Microsoft said in its earnings release.

Between the lines: Stock traders have largely ignored poor earnings reports this year, preferring to look to a company's likely rebound once national quarantine orders are rescinded, and are expecting tech companies to weather the storm.

  • While most stocks have benefited from investors' forgiving approach, Microsoft joined Netflix as one of the companies that actually grew stronger during the early onset of the pandemic, which had led to a 4.8% contraction in U.S. first quarter GDP.
  • Microsoft shares rose more than 2% in after-hours trading and have gained around 12.5% so far this year, while the S&P 500 has fallen just over 11%.

On the other side: Earnings season has not been nearly as kind to the rest of the market. First quarter earnings are on pace to fall by 15.8%, a number that has decreased each week of earnings season and would mark the largest year-over-year decline for the S&P since the second quarter of 2009, according to FactSet.

  • Analysts are expecting year-over-year earnings declines in the second quarter (-31.9%), third quarter (-16.9%) and fourth quarter (-7.4%) this year.

Be smart: The combination of crumbling earnings and rising investor optimism already has brought the broader market's overall valuations to historically high levels, with FactSet clocking the S&P's 12-month forward price to earnings ratio at 19.1 and the Nasdaq's at 27.1.

The bottom line: Most companies are struggling to tread water, but Microsoft's earnings and the respectable showings from Facebook and Alphabet this week could provide a shot in the arm to an already bullish market racing back from its March 23 nadir.

2. Catch up quick

Oil and gas giant Chesapeake Energy has held discussions with creditors about a possible $1 billion loan while it prepares a potential bankruptcy filing. (Reuters)

Gilead's remdesivir, an antiviral drug, appears to help coronavirus patients recover more quickly than no treatment at all, but does not significantly reduce death, preliminary data showed Wednesday. (Axios)

A former CFPB economist alleged Trump administration officials now heading the agency manipulated its research process in an effort to dismantle regulations on payday lending. (N.Y. Times)

3. The Fed commits to "whatever it takes" and then some

Photo illustration: Sarah Grillo/Axios. Photo: Scott Olson/Getty Images

Fed chair Jerome Powell made clear the U.S. central bank had no plans to raise interest rates anytime soon and expects the economy to need monetary assistance for some time.

  • In his remarks, Powell expressed concern about "considerable risks" to the economic outlook over the "medium term," which he defined as at least over the next year.

Why it matters: Powell and the Fed have been out in front of the global policy response to the coronavirus pandemic from day one, taking an abundance of precautionary action long before the impact of the virus was clear to most others.

Between the lines: The Fed's statement opened by saying the central bank "is committed to using its full range of tools," one of few notable changes from its policy statement last month, but one that set a clear tone.

  • "We are going to be very patient," Powell said during the press conference. "That means we are not going to be in any hurry to move rates up."

What it means: "The message appears to be that officials are planning on making the forward guidance more dovish, and with more specificity, before too long," analysts at TD Securities said in a note to clients.

  • That could potentially include: some inflation targeting, a plan to hold rates at zero until unemployment reaches a certain level, or yield curve control policies focused on holding U.S. interest rates near the zero lower bound, they added.
  • "We are keen to see the minutes in three weeks time."

The bottom line: "The Fed is committed to doing 'whatever it takes,' and more, just to make sure," BlackRock CIO of global fixed income Rick Rieder said in a note to clients, quoting former ECB president Mario Draghi's famous pledge during the eurozone debt crisis.

  • "The FOMC has at this meeting taken the opportunity to begin laying out the transition from emergency support of market functioning to a longer-term Large-Scale Asset Purchases regime."
4. Bolsonaro has Brazil headed for worst recession ever
Expand chart

Data: FactSet; Chart: Axios Visuals

Initially hailed as a savior of Brazil's economy as stock prices climbed to record highs after his election, President Jair Bolsonaro now has the country's markets on a crash course.

What's happening: Brazil's benchmark stock index has been one of the world's worst performers, down by nearly 30% in its local currency so far this year, and lower by 46% in U.S. dollar terms.

  • The country's real currency also has been among the world's weakest assets, down by around 25% against the dollar year to date.
  • In the first quarter, Brazil's stock market declined by 51% with its currency losing 37%, the steepest fall since 1994.

One level deeper: Brazil's economy is falling apart as it has become the Latin American epicenter of the COVID-19 outbreak and Bolsonaro dismisses the pandemic as a “fantasy” or “a little flu.”

  • The president also has fired or alienated powerful allies, including his most popular cabinet member, former Judge Sérgio Moro, who resigned on national television Friday while accusing the president of trying to tamper with ongoing police investigations.
  • (The country's federal police are investigating two of his sons.)

Keep it 💯: Citing more widespread and lasting damage from the coronavirus outbreak, economists at Citi now expect “the worst annual contraction ever” this year for Brazil's economy, predicting a decline of 4.5%, versus an earlier forecast of a 1.7% decline.

5. Record retail trading could be due to lack of gambling options

Online brokerages have seen a record number of new accounts opened this year as so-called mom and pop retail investors look to buy the dips and cash in on the market's late February selloff.

By the numbers: "TD Ameritrade said last week that retail clients opened a record 608,000 new funded accounts in the quarter ended March 31, with more than two-thirds of those opened in March," WSJ reports.

  • "E*Trade saw a net gain of 363,000 accounts in the quarter — a company record — around 90% of which were retail."
  • "Charles Schwab Corp. reported a record 609,000 new brokerage accounts in the quarter, including individuals’ self-directed accounts and those managed by financial advisers."

Watch this space: Retail traders, especially those using the stock trading app Robinhood, have shown unusual buying patterns, pursuing cheap and particularly volatile stocks, DataTrek Research co-founder Jessica Rabe points out in a note to clients.

  • “The rush of retail investors into U.S. equities is at least partly a function of a world with no casinos, no sports betting to speak of (horses and ping-pong aside), and little to do outside the home."

My thought bubble: Rabe and DataTrek co-founder Nicholas Colas also "glibly" dismissed the importance of the record growth of M2 money supply highlighted by Axios Markets in their note yesterday. Shots fired? (Kidding.)

Go deeper: Investment professionals are selling while mom and pop buy the coronavirus dip

Quote: "It’s not fair to feel proud of lineage. You are all about your karma.”

Why it matters: Irrfan Khan, one of Indian cinema's top stars and one of the world's most well-known Muslim actors, died on Wednesday at the age of 53. He was among Bollywood's most successful exports to Hollywood, starring in films including "Slumdog Millionaire," "Life of Pi" and "Jurassic World."