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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. US markets rally loses steam as tech fades

2. Oil prices tumble, then recover in volatile session

3. Get ready for more Fed medicine

4. Personal finance anxiety is climbing

5. We are watching a lot of TV

Markets Closed

Dow
24,101.55
−32.23 (-0.13%)

S&P
2,863.39
−15.09 (-0.52%)

Nasdaq
8,607.73
−122.43 (-1.40%)

VIX
33.64
+0.36 (+1.02%)

Bitcoin
$7,780.08
+$34.83 (+0.45%)

US 10-Yr Yield
0.61
−0.0460 (-7.01%)

Image Credit: Glenn Gilbert / 500px

Markets Today

U.S. markets couldn't hold on to early gains as tech stocks dragged all the indexes lower in a reversal of the recent trend. Harley Davidson (HOG) led the gains along with airlines and other transport stocks. The Dow Transports closed above their 50-day moving average for the first time since mid-February, which is a head-scratcher, although planes are starting to fill up again (see pic below).

I'm not ready for that.

Oil prices continued their volatility as the June contract for WTI fell by as much as 20% in early trading, but recovered to only close down 3%. The number of global coronavirus cases topped 3 million with one million of those here in the U.S. There have been hopeful signs on the vaccine front, but a robust solution is likely still many months away.

The Fed began a two-day meeting on interest rates today, and while no rate changes are expected, we all want to know what other ammunition it has in the armory to prop up the economy and financial markets. We also kind of want to know the long-term effects of everything it is doing, but we'll take that pain later.

Photo: Association of Flight Attendants

Headlines:

Alphabet reported higher-than-expected revenues, but lower-than-expected earnings for its first quarter. Alphabet's CFO Ruth Porat, blamed this on a "significant slowdown in ad revenues." Overall revenues came in slightly higher than expected. Markets are reasonably happy with the performance, as Alphabet's stock is up slightly in after-hours trading.
Starbucks reported lower-than-expected earnings for its second fiscal quarter. While its overall revenue came in slightly above expectations, its same-store sales decline was larger than expected. The company has been hit hard by the COVID-19 pandemic.
West Texas Intermediate futures for June delivery fell by 44 cents, or 3.4%, to settle at $12.34 per barrel. International benchmark Brent crude traded 22 cents higher to settle at $20.21. Earlier WTI had been down more than 20%, touching a session low of $10.07, while also trading as high as $13.69.
Shares of Harley Davidson jumped more than 15% following first quarter results. The company beat analysts' estimates for sales and profits, although earnings dropped 45% year-over-year as worldwide lockdowns hit sales. The company also cut its dividend by two cents, and said it would suspend its share-repurchase program.
The New York Attorney General Letitia James says Amazon's health and safety measures are so "inadequate" it may have violated the Occupational Safety and Health Act (OSHA). James is also investigating potentially illegal firings of workers who chose to protest. She made these comments in a letter to Amazon seen by NPR.
3M reported Q1 earnings and revenue that exceeded analysts' expectations as it saw "strong growth in personal safety." Adjusted EPS was $2.16 on revenue of $8.1 billion. The company doubled global respirator output during this period to 100 million/month. It withdrew its 2020 outlook due to pandemic-related uncertainty.
Caterpillar said revenue fell 21% to $10.6 billion and adjusted EPS almost fell by 50% to $1.60 in the first quarter. Both were lower than Wall Street predicted. The company is not providing a financial outlook for 2020 at this time.
Southwest posted its first loss since the first quarter of 2011. The Dallas-based airline lost $94 million in the quarter on revenue of $4.23 billion. It predicts operating revenue will decrease 90-95% in April and May from a year earlier.
Keurig Dr Pepper posted a Q1 earnings beat and reaffirmed its guidance for 2020 at a time when most firms are withdrawing guidance. Net sales increased 4.4% to $2.61 billion as consumers stocked up on packaged drinks. Coffee pod volume grew 5.6% despite restaurant and office closures.
Boeing will resume 787 operations at the South Carolina plant with most workers returning on May 3 or May 4. The company said it has taken measures to ensure the health and safety of everyone including PPE access, hand sanitizing stations, and enhanced cleaning.

chart courtesy Bank of America

Fed Medicine

The Federal Reserve has been the proverbial White Knight in the stock market's recent recovery. The Federal Open Market Committee began a two-day meeting today on interest rates, and while almost no one thinks the committee will lower rates given that they are already at zero, the Fed has a lot more monetary policy ammunition to throw at this crisis.

The Fed recently expanded its support for municipalities and states and pledged to buy ETFs and junk bonds. It has pledged trillions of dollars in purchases of government securities, including Treasury bonds and mortgage backed securities. As those purchases wane, as seen in the chart above, the Fed is likely to lay out other mechanisms to support the economy. Here are the questions economists at Bank of America and other investment shops are asking of the Fed right now:

Moral hazard: Powell will likely have to address the "costs" of entering parts of the market that are typically seen to be outside of the Fed's mandate. The Fed is directly engaging in markets including investment grade credit (with some high yield) and munis. If the Fed can enter the credit market, why not equities?
Main Street Lending Facility: When will the facility be up and running? Which types of companies are they targeting? Does the Fed believe there will be sufficient interest?
What is the shape of the recovery? While he may not say it directly, Powell may likely send a signal that the Fed is not counting on this to be a V-shaped recovery. He may also talk about the risk of a double-dip recession depending on the health response, which is an important variable outside of the Fed's control.
How is the Fed thinking about industry trends? Powell may talk about the sectors that are likely to be hit the hardest and where there is some potential for long-term damage.

chart courtesy Deutsche Bank

Volatility and the Virus

There is an obvious correlation between a cooling down of volatility, a peaking in COVID-19 cases, and the performance of the stock market. That has been the story of the past month as financial markets have rebounded and economies started to reopen.

However, the realities of the economic destruction to countries, states, cities and citizens is just beginning. Businesses are closing, first time unemployment claims are still in the millions, continuing claims will be in the tens of millions, and delinquencies on credit cards are starting to rise.

Which is probably why our Anxiety Index is spiking again. As a reminder, it tracks our reader interest in fear-based terms across markets, the global economy, and personal finance. Reader interest in unemployment insurance, foreclosure, short-sales, and forbearance is climbing, as we brace for the worst.

Watching More TV

This pandemic has caused all kinds of behavioral shifts, from what we eat to where we focus our attention. It may have inadvertently slowed the decline of television watching among millennial audiences, as well. Data from eMarketer shows a 3-4% increase in viewer growth among that demographic after years of declines. This decline is projected to restart next year. This is without live sports, which makes it even more remarkable.

chart courtesy eMarketer

More News:

Goldman Recommends Barbell Strategy for Reopening

Top Consumer Discretionary Stocks for May 2020

Should Google Pay a Dividend to Stockholders?

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(chart courtesy YCHARTS)

Motorcycle manufacturer, Harley-Davidson, rose substantially today after reporting strong financial results, for more, see above. Airlines and cruise lines also did very well today, possibly due to expectation that the COVID-19 pandemic has peaked.

Insurance firm, Cincinnati Financial, fell significantly today after it reported lower-than-expected earnings. United Parcel Service (UPS) also fell significantly after reporting earnings. While deliveries were up overall, these were mostly low-margin deliveries to homes, whereas higher-margin deliveries to businesses, many of which are shut down, have dried up. UPS also halted buybacks.

Word of the Day

Reversal

A reversal is a change in the price direction of an asset. A reversal can occur to the upside or downside. Following an uptrend, a reversal would be to the downside. Following a downtrend, a reversal would be to the upside. Reversals are based on overall price direction and are not typically based on one or two periods/bars on a chart. Certain indicators, such a moving average or trendlines, may help in isolating trends as well as spotting reversals.

chart courtesy MarketWatch

Today in History

April 28th, 1942

The World War II bear market hits bottom, as the Dow Jones Industrial Average closes at 92.92, down 0.97 points for the day and 16.3% for the year to date. Over the next four years, the market more than doubles.

The Wall Street Journal, October 10, 2000, p. C15; http://averages.dowjones.com