March 26, 2020 - This week promises to be filled with volatility as markets continue to reel from what amounts to a shutdown of large parts of economy around the world.
China seems to be re-opening for business, which is a good sign, but given that they began restrictions on movement and businesses in January, it seems the rest of us likely have a ways to go before we can return to something resembling normal. China is still taking people's temperatures, while Hong Kong, facing a second wave of cases, is limiting international travelers.
Here in the U.S., government is still going to drive the market. The Federal Reserve added new measures this week aimed at stabilizing markets. They uncapped a previously announced asset-purchase program and will now purchase an unlimited amount of Treasuries and agency mortgage backed securities. The central bank also announced a range of measures to ensure that credit markets continue to function. The measures include a new lending facility for non-bank businesses, and programs to support both the asset-backed securities markets and corporate debt markets.
Some of these measures were used with some success during the financial crisis, and while this didn't start as a financial crisis, it has the potential to become one. It's good that the Fed is being proactive and getting these measures in place before we see further disruption in credit markets.
The other side of government's support for the economy, fiscal policy (different from the monetary policy controlled by the Federal Reserve), is up to Congress and the White House. That's where we seem to be stuck at an impasse as the Senate has failed twice in two days to move forward with a bill to help keep money flowing to people who are out of work and businesses that are still accumulating expenses while their revenues dry up.
April 1 seems to be a key date here as that's the point when most Americans and lots of small businesses will have rent or mortgage payments coming due. With many of those households and businesses probably having had their incomes slashed by 50% or more for March, this seems like a tipping point for the economy. With many jurisdictions having suspended evictions for the time being, households low on cash may well opt to skip house payments in favor of food or other more immediate necessities. This is where the crisis starts to spread as landlords likely also have financial obligations they may struggle to meet without the expected number of dollars rolling in on the first.
Many economists believe that the easiest resolution to this particular part of the crisis is to provide cash to households so they can continue to fulfill their obligations on time and keep the issues from spreading.
Members of Congress have demonstrated different levels of understanding on this issue. We now find ourselves waiting to see what can get passed, and when, before we'll have any idea to what extent we'll see massive numbers of payments missed at the start of the month.
Meanwhile, as negotiations seem to have started to struggle, it seems the White House position has started to shift. President Trump sent a tweet Sunday evening saying "WE CANNOT LET THE CURE BE WORSE THAN THE PROBLEM ITSELF. AT THE END OF THE 15 DAY PERIOD, WE WILL MAKE A DECISION AS TO WHICH WAY WE WANT TO GO!"
This was followed by reports in the Washington Post and other media outlets that the administration is considering trying to scale back on measures meant to limit the spread of coronavirus in favor of limiting the damage to the economy. The 15-day period began on March 16 and so will run to the end of this month anyway.
What remains to be seen is how much economic activity Trump can actually turn back on. The White House did issue guidelines about social distancing, but has not actually ordered any change in behavior. Governors and mayors are the ones who have actually put restrictions in place, and as such, are the only ones with the authority to lift them.
With little clarity as to what the future holds in terms of economic activity, we expect the market to trade largely in line with prospects for the passage of a bailout bill.
We saw, what was at the time, one of the market's largest single-day declines in history when the first TARP vote failed in 2008, that sort of thing doesn't seem to be out of the question here. We could also get a big relief rally if something passes, but we'll want to take a close look at the particulars of the bill before making any decisions about individual stocks.
Economic Events this Week
The weekly unemployment claims are going to be the highlight this week from an economic data perspective. The rest of this data looks back to February, while initial claims is for the period that ended March 20.
- Tuesday
- 10:00 a.m. New Home Sales
- Wednesday
- 8:30 a.m. - Durable Goods Orders
- 10:30 a.m. - EIA Crude Oil Inventories
- Thursday
- 8:30 a.m. - Initial Claims
- 8:30 a.m. - Continuing Claims
- Friday
- 8:30 a.m. - Personal Income
- 8:30 a.m. - Personal Spending
- 8:30 a.m. - PCE Prices
- 10:00 a.m. - Univ. Of Michigan Consumer Sentiment - Final
Earnings Reports this Week
The earnings calendar is pretty light this week. Nike and Winnebago are probably the highlights.Tuesday:
- Before the bell: IHS, QIWI
- After the bell: HOME, GO, NKE, SCS
- Before the bell: PAYX, WGO
- After the bell: FUL, MU, SCVL, VRNT
- Before the bell: CSIQ, ERJ, FDS, LK, SIG, WOR
- After the bell: GME, JEF, KBH, LULU, RH,
- Before the bell: SCWX