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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. US markets jump as virus levels ease in Europe

2. Oil prices fall as OPEC+ delays meeting

3. Volatility has mellowed

4. Looking at the equity risk premium for US stocks

5. Zoom shares see sharp pullback on hacker concerns

Markets Closed

Dow
22,679.9
+1,627.46 (+7.73%)

S&P
2,663.63
+175.03 (+7.03%)

Nasdaq
7,913.24
+540.15 (+7.33%)

VIX
45.24
−1.56 (-3.33%)

Bitcoin
$7,211.63
+$428.74 (+6.32%)

US 10-Yr Yield
0.676
+0.089 (+15.16%)

photo: Maja Hitij/Getty Images

Markets Today

Stocks surged out of the gate today and rallied through the session, gaining steam towards the closing bell. It was a refreshing sign to see markets hold gains through the day, which has not been the case over the past several weeks. There were encouraging reports out of Europe that the number of new coronavirus cases may be leveling off or even declining in some countries. U.S. markets all closed 7% or higher on the day.

The DJIA has now rallied 25% off its lows in March. All 30 Dow components rallied today as did all 11 sectors of the S&P 500. A balanced rally like today's shows that investors are gaining broader confidence in buying stocks, which has not been the case over the past month. This may not be the bottom, but there are multiple signs that a foundation of support is forming under the major indexes. It happened a couple of weeks ago and didn't hold.

Will it be different this time?

Headlines:

The Federal Reserve said it would create a new program to finance loans that banks and other lenders make through the government's emergency small-business lending program. The move will free up financial firms to make more loans guaranteed by the Small Business Administration's Payroll Protection Program, part of a $2.2 trillion economic relief package.
Crude oil prices fell 7% today, after the OPEC+ meeting, scheduled for this morning, was postponed. The group of oil producers are now expected to meet on Thursday to talk about cutting production and stopping the ongoing price war.
The International Monetary Fund may launch a new program to help address the global shortage of dollars, providing a backup to the Federal Reserve's campaign to keep the U.S. currency flowing around the world economy, according to Bloomberg. IMF Managing Director Kristalina Georgieva is preparing to offer short-term dollar loans to countries that lack enough Treasuries to participate in a Fed program which enables foreign central banks to temporarily exchange U.S. debt for dollars.
JPMorgan CEO Jamie Dimon released his annual letter to shareholders today, emphasizing the financial health of the bank and its commitment to its stakeholders and employees during this crisis. Dimon, who recently underwent emergency heart surgery, did not comment on his own health. He did say the current recession is as bad as that of 2008–09, however.
Apple is going to produce and distribute 1 million face shields a week for health workers, says CEO Tim Cook. The tech giant has designed face shields that can be assembled in two minutes and packed 100 to a box. It has also procured and donated 20 million N95 masks.
Saudi Arabia's public investment fund has taken an 8.2% stake in Carnival Corp. (CCL), according to an SEC filing. Carnival shares have fallen 83% year to date to about $8 a share as the number of coronavirus-related deaths on cruise ships has risen and ships have been turned away from ports. Shares of CCL jumped 20% on the news.
Video conferencing tool Zoom has added new privacy and security measures after "Zoombombing," the practice of entering and disrupting Zoom meetings uninvited, grew in popularity. CEO Eric Yuan admitted he "messed up." The Washington Post has also reported that recordings of Zoom meetings have emerged online, but the company contends this is users sharing the videos themselves, not a data breach.
Japanese media say the country's president will declare a national emergency this week as the number of coronavirus cases keeps rising. The government is also preparing a 60 trillion yen emergency stimulus package, including 10 trillion yen as handouts, according to Bloomberg.
Airbnb says that private equity firms Silver Lake and Sixth Street Partners will invest $1 billion in a combination of debt and equity that will support Airbnb's ongoing work to invest over the long term. The company did not disclose the latest valuation. But in early March, it lowered its internal valuation to $26 billion, from the $31 billion figure it raised in 2017, according to CNBC.

chart courtesy YCharts

Volatility is Mellowing

While still high by normal standards, volatility, as measured by the CBOE's VIX or "Fear Gauge," has definitely been trending lower over the past two weeks. Since the VIX measures implied volatility going out 30 days based on activity in S&P options contracts, it may be a sign that this trend could last.

It does not mean that markets will go higher from here, by any means. It just means that future bets on wild swings in the market have calmed down a bit, and those 9–10% intraday swings we saw in the first two weeks of March may not come back for awhile.

How Risky Are Stocks Right Now?

It's a pretty important question for all investors to be asking right now, given the steep sell-off and slight rebound we have seen over the past month. The global pandemic is still raging and we are just getting into the teeth of some very bad economic reports and earnings results from companies, so the forecast doesn't look great. However, the forecast is slowly coming into focus, so any visibility is useful right now.

One way of measuring risk is looking at the equity risk premium, which measures the excess return that investing in the stock market provides over a risk-free rate. The rate that is most commonly used is the 10-year U.S. Treasury bond, which is typically considered to be one of the safest investments on the planet. By measuring the forward earnings yield of the S&P 500 against the 10-year U.S. Treasury's yield, which is around 0.7%, you can come up with the equity risk premium for owning the stock market.

Morgan Stanley's research team compares the equity risk premium today to where it was during the last financial crisis in 2008–09 (chart above). If S&P 500 earnings decline by 25% on average, which would be lower than the team's most bearish forecasts, the equity risk premium would still be well above the post-crisis range that lasted until 2013.

That's a sign that stocks may have been discounted too much in the sell-off and the risk premium is attractive to big investors who are going to be starving for yield. Since yields for bonds, especially government bonds, are expected to stay very low for quite awhile, Morgan Stanley expects investors to come back to stocks, albeit defensive stocks, very soon.

Chart courtesy YCharts

ZOOM or ZM? What's in a Ticker?

For everyone working from home who needs to connect with co-workers, Zoom Video Communications, which trades under the ticker symbol (ZM), has been indispensable. The company made its platform free for K–12 students in the U.S., and my kids have been using it daily, as have my wife and I. Shares of ZM have been on a tear this year, up nearly 40% in just the past two months.

Lately, however, there have been concerns about the platform's vulnerability to hackers and data privacy concerns, which have trimmed the company's stock and its market value. It's still valued at over $38 billion, which shows how manias can stretch valuations in both directions. Yesterday, NYC public school students were informed that the Dept. of Education would discontinue using Zoom and switch kids over to Microsoft's Teams platform.

And then there's Zoom Technologies, which trades under the ticker symbol (ZOOM). Shares are up 328% in the past two months, but they climbed as high as 865% two weeks ago as some investors likely thought they were buying ZM. Zoom Technologies researches, develops, and sells electronic-communication products for mobile phones, so it's in a slightly different business. Trading was so intense in ZOOM that the stock was halted on March 26th by the SEC due to volume. It wasn't the first time this ticker confusion benefitted Zoom, either. When Zoom (ZM) filed to go public about a year ago, shares of ZOOM spiked as investors zoomed past the ticker and bought the wrong company.

More News:

RH Stock Attempts Rebound After Death Cross

Real Estate Stocks Enter Long-Term Downtrends

Wells Fargo Stock Is 'Nearly Too Cheap to Ignore'

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(chart courtesy YCHARTS)

Shares of lightweight metals manufacturer Arconic are up by nearly 30% after Governor Tom Wolf urged manufacturers capable of producing coronavirus-related items to submit their information to the Pennsylvania Manufacturing Call to Action portal. Apache's stock price rose by nearly 15% today; although the OPEC+ meeting scheduled for Monday was postponed, a new meeting has already been rescheduled for Thursday. Other hydrocarbon exploration companies, such as Diamondback (nearly 9%) and Devon Energy (over 7%), also rose today.

Shares of Raytheon Technologies are down by 42% after the defense contractor was spun off from the merger of United Technologies and Raytheon. Xerox's share price fell by nearly 9% as the new work-from-home environment lessens the need for printers and other related products.

Word of the Day

Equity Risk Premium

Equity risk premium refers to the excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies depending on the level of risk in a particular portfolio and also changes over time as market risk fluctuates. As a rule, high-risk investments are compensated with a higher premium.

image courtesy: IntelSat.com

Today in History

April 6th, 1965:

A rocket takes off from Cape Canaveral, Florida, launching Intelsat I, or "Early Bird," into orbit. The world's first commercial communications satellite is up and floating—making the world a much smaller place, as live TV signals can bridge the oceans and improved telephone transmissions can reach the remotest parts of the globe.