foxex: Back to Back

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. US markets rise for the first back-to-back days in six weeks

2. Congress has a deal on $2 trillion stimulus package

3. Mortgage applications tumble as buyers back off

4. Prepare for the earnings cliff

5. Which companies can handle a cash crunch?

Markets Closed

Dow
21,200.55
+495.64 (+2.39%)

S&P
2,475.56
+28.23 (+1.15%)

Nasdaq
7,384.29
−33.05 (-0.45%)

VIX
63.95
+2.28 (+3.70%)

Bitcoin
$6,654.17
−$65.09 (-0.97%)

US 10-Yr Yield
0.858
+0.042 (+5.15%)

Markets Today

We haven't seen higher closes for the DJIA and S&P 500 back-to-back since early February, but we finally broke that streak today as investors remained in the buying mood. The U.S. Congress agreed to a $2 trillion stimulus package to blunt the impact of the coronavirus shutdown, although it still needs a final vote and a signature from the president to be official.

Here are some of the key tenets of the bill as it stands now:

Direct payments to families of $1,200 per adult and $500 per child for households making up to $75,000
Expansion of unemployment benefits to include furloughed individuals, gig workers, and freelancers. Benefits increased by $600 per week for a period of four months
A $500 billion fund for loans to corporate America
Hospitals will receive over $130 billion
State and local governments to receive $150 billion
Ban on stock buybacks and dividends for companies receiving government loans during the term of their assistance plus one year
$367 billion loan program for small businesses
Cash grants of $25 billion for airlines (this is in addition to loans), $4 billion for air cargo carriers, $3 billion for airline contractors (caterers etc.)

Lawmakers are expected to vote on the bill tomorrow, and the passage can't come soon enough—especially for small businesses that are facing a major cash crunch.

Volatility was higher today, but relatively tame as the DJIA climbed 2.3% and the S&P 500 rose more a little over 1%. It's far from a trend, but lower volatility across all markets and two days of gains for the Dow Industrials and the benchmark S&P 500 are healthy signs in dangerous times.

SPONSORED BY PERSONAL CAPITAL
Are You Worried About Today's Volatile Market?
One day the market goes down, the next, it's back up. What does that mean for your retirement plans? These insights can help you weather the storm.
Read More »

Headlines:

U.S. auto sales are expected to fall at least 15% this year according to new research from IHS Markit. IHS Markit forecasts 2020 U.S. auto sales to be 14.4 million units, down by at least 15.3% year-over-year. The global auto sales forecast is expected to decline more than 12% from last year to 78.8 million units, which would be a larger decline than the 8% drop during the Great Recession a decade ago.
The Big 3 automakers—Ford, General Motors, and Fiat Chrysler—will keep plants closed into April, according to sources speaking with Reuters. They had said on March 18th that manufacturing would be stopped until at least March 30th.
Yields on both the 1-month and 3-month U.S. Treasury bills dipped below zero Wednesday, a week and a half after the Federal Reserve cuts its benchmark rate to near zero. Investors have flocked to the safety of fixed income amid market turmoil. It was the first time that happened in 4½ years, when both bills briefly flashed red and yields fell to –0.002% each.
The Federal Reserve has tapped BlackRock, the largest asset manager in the U.S., to steer tens of billions of dollars in bond purchases as part of its new policy move to shore up the credit market. BlackRock will purchase agency commercial mortgage-backed securities secured by multifamily-home mortgages on behalf of the New York Federal Reserve.
Total U.S. mortgage application volume fell 29.4% last week from the previous week, according to the Mortgage Bankers Association. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) increased to 3.82% from 3.74%, with points decreasing to 0.35 from 0.37 (including the origination fee) for loans with a 20% down payment. That is the highest level since mid-January.
Micron Technology reported higher-than-expected sales and earnings exactly matching analyst estimates of $0.36 a share. Micron's gross margin disappointed, falling a few points below expectation, and significantly lower than this time last year. However, margins are up from Micron's previous quarter, and the company's outlook for next quarter included a further increase.
Square (SQ) has revised its first quarter guidance and withdrawn its full-year 2020 guidance. It now expects net revenue in the range of $1.30 to $1.34 billion and gross profit of $515–525 million for Q1. The company is also refunding all software subscription fees for the month of March for existing sellers. Shares climbed 13% today.
Orange juice futures are up 22% in March. Bloomberg says this is the biggest monthly gain since Oct. 2015. Orange juice has a high vitamin C content, which supports the immune system.

Here Comes the Earnings Cliff

The economic slowdown that is already at our shores will throw the brakes on corporate earnings, which is one of the reasons investors have been so quick to bail out of stocks. Since stocks are usually priced on future earnings, and earnings will be compromised by a lack of business and consumer spending, the impact across sectors will be severe.

Bank of America's research team has modeled out what that shortfall will look like as GDP sinks in the second quarter as much as 20%. The impact to the energy sector, which is suffering from both a supply and a demand shock, will be the most severe.

After that, financials, industrials, materials, and consumer discretionary will be the most impacted. This explains why big investors have been buying into the historically recession-resistant industries like utilities, healthcare, and staples in the past week.

chart courtesy Bank of America

We put this handy guide together for our readers who are asking us a lot of questions about how to navigate their investments and personal finances in times of heavy volatility. Take a look. We hope it helps.

charts courtesy GoldmanSachs

Which Companies Can Handle a Cash Squeeze?

Business revenue is already plummeting in many industries as normal economic activity shuts down due to the coronavirus. The extent of the damage to these industries and the companies within them will depend on whether they can survive a cash crunch in coming months.

Companies are already having to make tough decisions about their payrolls, their current and future investments, and the return of cash to shareholders in the form of dividends and other means. Layoffs are already happening, and we are likely to see a huge spike in weekly unemployment claims tomorrow in the U.S.

Goldman Sachs research team has been modeling out which industries will take the biggest revenue hits and the measures they can take to continue operating with negative cash flows. According to Goldman, while last year about 20% of companies required an increase in external financing to continue operating, the virus shock would raise this figure to about 31% within six months. This implies that the revenue hit from the virus will cause an additional 11% of companies to require additional financing from credit or capital markets over the next six months. While that's a large increase, it's not insurmountable. That's one of the reasons the Federal Reserve has opened up a discount lending window for companies to borrow from the Central Bank, risk-free, for up to four years.

Small Businesses are in Much Worse Shape

Small businesses do not have the luxury of issuing debt or selling stock to raise capital. Many operate on credit and month-to-month financing just to keep their doors open. In the U.S., small businesses employing fewer than 100 workers account for about 35% of private sector employment, and companies employing 100–500 account for another 17%, according to Labor Department statistics.

Goldman surveyed a group of 10,000 small businesses about how long they can operate if the economy is shut down for several months. The reality is that most could only make it up to three months, at best, and very few could make it six months to one year.

That's one of the key reasons that the stimulus package plans to direct $367 billion towards small businesses. The U.S. economy can't let them go under and lay off their workforces.

More News:

WWE Stock Fails to Break Out After Analyst Downgrade

3 Restaurant Stocks That Might Not Survive the Pandemic

Is It Time to Buy Energy Stocks?

Participate in Our Investing Survey!

(chart courtesy YCHARTS)

Shares of Norwegian Cruise Line are up by more than 42% after the White House and the Senate came to an agreement on a $2 trillion coronavirus stimulus bill. American Airlines' stock price rose nearly 36% on the same news, as both companies belong to industries hard hit by the coronavirus and stand to receive significant aid from the new bill.

Shares of Clorox are down by just over 1%, making it one of several recently-booming companies to fall today as the coronavirus-fueled spending rally seems to be slowing down. Netflix's stock price fell almost 1% amid reports of widespread outages across the U.S. and Europe.

Word of the Day

Zero-Bound Interest Rate

Zero-bound interest rate is a reference to the lower limit of 0% for short-term interest rates beyond which monetary policy is not believed to be effective in stimulating economic growth. Zero-bound interest rate assumptions have been upended in recent years. In monetary policy, reference to a zero bound on interest rates means that the central bank can no longer reduce the interest rate to encourage economic growth. As the interest rate approached the zero bound, the effectiveness of monetary policy as a tool was assumed to be reduced. The existence of this zero bound acted as a constraint on central bankers trying to stimulate the economy.

image courtesy ricurrency.gov

Today in History

March 25th, 1809:

The earliest known bank failure in the U.S. is reported when the Farmers Exchange Bank of Glocester, R.I., goes bust after issuing $800,000 in fraudulent loans against total capital of $45.

Bray Hammond, Banks and Politics in America: from the Revolution to the Civil War (Princeton Univ. Press, 1991 ed.), pp. 172–176.