foxex: Comfort Arrives

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. US markets surge 3% on testing and treatment hopes

2. Oil prices dive 6% to an 18-year low

3. The Fed predicts 47 million job losses

4. Vanguard's clients "stay the course"

Markets Closed

Dow
22,327.48
+690.70 (+3.19%)

S&P
2,626.65
+85.18 (+3.35%)

Nasdaq
7,774.15
+271.77 (+3.62%)

VIX
57.08
−8.46 (-12.91%)

Bitcoin
$6,416.11
+$501.45 (+8.48%)

US 10-Yr Yield
0.67
−0.079 (-10.55%)

photo: Jim Watson/Getty Images

Markets Today

U.S. markets staged an impressive day-long rally that strengthened into the closing bell for the first day in many to start the trading week. Volatility was still high, but relatively tame as all major indexes closed 3% or higher. Gold prices fell just under 1% as investors came back to risk assets, but not entirely, as the yield on the U.S. 10-year Treasury fell to 0.71%. Oil continues to slide, falling another 6% to an 18-year low.

There was some rare good news on the fight to detect and prevent the further spread of the coronavirus. President Trump said Sunday that social distancing guidelines should be kept in place until the end of April, which is in line with other major countries facing increases in illnesses and fatalities.

Drug makers and healthcare companies had also reported a few potential breakthroughs on the vaccination and testing fronts:

Johnson & Johnson announced it had a vaccine candidate
Abbott Labs said it will provide 50,000 test kits a day that could detect the virus in a matter of minutes
Henry Schein also said it will be providing test kits

Healthcare stocks and the entire sector have been leading the market gains over the past week or so as investors are placing more emphasis on the detection and vaccination of COVID-19. The Vanguard healthcare ETF, VHT, has surged 20% in the past five sessions.

Headlines:

Moody's Investors Service has cut its outlook on corporate debt to negative, saying that an economy about to tip into recession because of the coronavirus will result in rising default rates. The ratings agency warned that sectors "most sensitive to consumer demand and sentiment" will be especially hard hit due to social distancing measures that slashed economic activity. They include global passenger airlines, the lodging and cruise industries, and autos.
Apple supplier Foxconn's net profit fell 23.7% in the fourth quarter before the coronavirus pandemic struck. Foxconn is the world's biggest contract electronics assembler, and Apple is its biggest customer.
Health insurers Cigna and Humana will waive out-of-pocket costs for fully insured virus patients. The self-insured employer plans, where the employer holds the financial risk and the insurer administers benefits, will be encouraged to also waive those costs, but can opt out. Cigna's offer will close on May 31, while Humana has no deadline, pending evaluation.
The U.S. Dept. of Justice has started to probe a series of stock sales made by lawmakers ahead of the market downturn that followed the spread of COVID-19 into the United States.
Richard Branson's Virgin Orbit partnered with medical researchers and developed a ventilator device that the company plans to mass produce and send to hospitals around the United States to fight the coronavirus. Virgin Orbit's device compresses medical ambu bags, which help patients with COVID-19 to breathe.
Macy's said it would furlough the majority of its workers starting April 1st. The company employs about 130,000, including staff in its luxury chain Bloomingdale's and its Bluemercury stores. It will keep a smaller workforce to maintain basic operations, such as its digital business, distribution centers, and call centers.
Blue Origin, the space exploration company founded by Amazon chief executive Jeff Bezos, is to continue operating through the coronavirus crisis after being deemed an "essential" business by the U.S. government.
Mortgage bankers are being hit with "staggering and unprecedented levels" of margin calls on their hedge positions. In a letter to the SEC asking for help, the Mortgage Bankers Association has said the Fed buying hundreds of billions in mortgage-backed securities and the rally in their prices is having a negative impact on lenders who short the securities to protect themselves from rate increases.
Instacart announced new safety and tipping features for its workers ahead of a planned strike. Shoppers, as the freelance employees are known, that are part of an organization called Gig Workers Collective (GWC) are asking for safety precautions at no cost to workers, hazard pay, and an extension and expansion of pay for workers impacted by COVID-19. GWC has called Instacart's response a "sick joke" and "insulting." Amazon warehouse workers in New York also went on strike today.

Fed Warns of 47 Million Job Losses

Not known for hyperbole or exaggeration, the Federal Reserve, in a research paper, warned that U.S. job losses could top 47 million due to the economic slowdown brought on by COVID-19. That would translate to a 32.1% unemployment rate, according to a recent analysis of how bad things could get.

The Fed's researchers classified the American labor force into three high risk groups:

Whether those occupations are essential to public health or safety
Whether they involve work that can be completed off-site
Whether they are salaried

Given the size of the U.S. labor force, which currently stands at 164.5 million people, the Fed said that 66.8 million people are employed in occupations that are at high risk of layoff. These include occupations in sales, production, and food preparation and services, among others. The chart above shows just the 22 million American workers connected to the agricultural and food production industries. Imagine every other high-touch industry, and it's not hard to see where that 47 million figure comes from.

We'll get weekly jobless claims again this Thursday, and given last week's 3.28 million claims, expect another big number. We'll also get the March non-farm payrolls report on Friday. It won't reflect the entire scope of coronavirus closures this month, but it will be a strong foreshadowing of what is to come.

Staying the Course

We've written a lot about how individual investors have been relatively aggressive during the recent market plunge and recovery. Trading data from online brokers shows us that individuals have been buying, rather than selling stocks at a 2:1 ratio for the past month. Zero fees for trading has been contributing to the frenzy, as has a steep discount for some very popular stocks.

Vanguard, which is known for its long-term perspective and adherence to index investing, tells us that its customers have been "staying the course" and not trading in response to recent market declines. It has noticed differences in how its clients are trading, based on their ages:

The typical customer is buying equities on the dips.
Older, wealthier customers are moving modestly to fixed income.
Investors, on balance, are maintaining a long-term perspective despite the market turmoil—especially those with Defined Contribution Accounts.
IRA and taxable-only households had the highest incidence, with one-quarter of them trading.

Vanguard founder and the father of index investing, Jack Bogle, would be proud.

More News:

Amgen Stock Looks to Break Out After Analyst Upgrade

The 3 Strongest Stocks in the S&P 500

S&P 500 Earnings May See First Double-Digit Drop in Decade

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(chart courtesy YCHARTS)

Shares of AvalonBay Communities rose by almost 7% after the Fed issued new guidance stating that real estate is an essential business; other real estate investment trusts are also up, including UDR (6%), Apartment Investment and Management Company (nearly 6%), Equity Residential (nearly 6%), Ventas (nearly 6%), Duke Realty (nearly 5%), and Mid-American Apartment Communities (nearly 5%).

Shares of Norwegian Cruise Line fell by over 23% as the entire industry struggles to remain afloat after non-U.S. based companies weren't included in the CARES Act; shares of other cruise lines, such as Carnival (19%) and Royal Caribbean (15%), are also down. Similarly, the U.S. oil industry is scrambling after also being left out of the stimulus package, causing the stock price of companies like Apache (almost 16%), Devon Energy (almost 15%), and Noble Energy (nearly 14%) to fall.

Word of the Day

Margin Call

A margin call occurs when the value of an investor's margin account (that is, one that contains securities bought with borrowed money) falls below the broker's required amount. A margin call is the broker's demand that an investor deposit additional money or securities so that the account is brought up to the minimum value, known as the maintenance margin.

A margin call usually means that one or more of the securities held in the margin account has decreased in value below a certain point. The investor must either deposit more money in the account or sell some of the assets held in the account.

image courtesy: Priceline.com

Today in History

March 30th, 1999:

Priceline.com goes public in one of the hottest initial public offerings ever: priced at $16, the shares open at $26.62 and close the day at $69, a first-day return of 331% (for those lucky few who could get in at the offering price). Exactly a month later, the stock hits $162.37—but a mere year-and-a-half after the IPO, Priceline.com is trading at less than $5 per share.

Source: The New York Times, Oct. 6, 2000, p. C1.