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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. DJIA and S&P 500 give up gains as tech trudges higher

2. US private payrolls shed 20 million jobs in April

3. The EU predicts 7.5% drop in GDP for 2020

4. Reading between the lines on earnings calls

5. ESG feels the flows

Markets Closed

Dow
23,664.64
−218.45 (-0.91%)

S&P
2,848.42
−20.02 (-0.70%)

Nasdaq
8,854.39
+45.27 (+0.51%)

VIX
34.12
+0.51 (+1.52%)

Bitcoin
$9,309.66
+$310.54 (+3.45%)

US 10-Yr Yield
0.711
+0.054 (+8.22%)

Image credit: Mint Images/Getty

Markets Today

Both the DJIA and the S&P 500 gave up early gains to close lower today. The Nasdaq closed higher as tech stocks continue to outperform all sectors.

The companies that are having success in this shutdown continue to show off their impressive first quarter report cards. Peloton is selling more bikes and classes than ever, CVS is cashing in on people's self-care, Clorox is selling more wipes and bleach, and Beyond Meat is taking advantage of the meat supply shock ravaging farms and infuriating carnivores.

We heard some dire forecasts from the EU this morning, which expects Eurozone growth to slow 7.5% in 2020. On the bright side, it expects a rebound to 6% growth in 2021. Feels like a long time from now... I know.

In the U.S., private payrolls saw their steepest decline in history, as 20 million jobs were lost in April. We'll get weekly unemployment claims tomorrow, which should also be in the millions, followed by the April employment report on Friday.

Headlines:

Private payrolls lost more than 20 million jobs in April as companies laid off workers amid a coronavirus-induced shutdown, according to a report on Wednesday from ADP. In all, the decline totaled 20,236,000—easily the worst loss in the survey's history, going back to 2002. The previous record was 834,665 in Feb. 2009 amid the financial crisis and accompanying Great Recession.
The European Commission projects that the EU economy will contract by 7.5% in 2020 and grow by 6% in 2021. The bloc's executive branch is currently working on a "recovery fund" proposal, and Paolo Gentiloni, European commissioner for the economy, says it should be worth around 1.5 trillion euros.
MGM Resorts said some of its 63,000 furloughed workers could be laid off starting Aug. 31 amid an uncertain outlook for the U.S. casino industry. In a letter to furloughed employees Tuesday, MGM Resorts Acting Chief Executive Bill Hornbuckle said demand for travel would be significantly decreased through the end of this year and possibly into the next because of the coronavirus pandemic.
Airbnb is laying off 1,900 of its 7,500 employees as it tries to build a more focused business as the pandemic changes how we travel. "We will need to reduce our investment in activities that do not directly support the core of our host community. We are pausing our efforts in Transportation and Airbnb Studios, and we have to scale back our investments in Hotels and Lux," said co-founder and CEO Brian Chesky.
Peloton's (PTON) revenue surged 66% during the third quarter, as more people purchased its fitness equipment and tuned into its live classes. The company reported an earnings per share loss of $0.20 on revenue of $524.6 million. Shares are up 5% after-hours.
Egypt expects to secure final approval for a $2.7 billion borrowing from the International Monetary Fund under the lender's rapid financing facility next week, according to Bloomberg. The country last month requested fresh assistance from the IMF via both a stand-by agreement and the so-called Rapid Financing Instrument, saying it was needed to shield the Middle East's fastest-growing economy from the fallout of the coronavirus pandemic.
Tyson Foods is resuming production at its facilities in Iowa and Washington after testing workers and enhancing safety precautions. President Trump signed an executive order to keep meat plants running, but it's proving ineffective. USA Today reports at least seven more have shuttered since the executive order, and unions told Bloomberg absenteeism is on the rise since employees are quitting out of fear.
Brazilian bonds extended losses after ratings agency Fitch cut the outlook to negative, citing the virus and political tensions stalling badly-needed reforms. Today, the country's central bank will probably cut the Selic rate (Brazil's federal funds rate) by 0.50% to 3.25%.
India's service sector activity crashed at a historic rate during April. The IHS Markit India Services Business Activity Index was 5.4 in April, an extreme decline from 49.3 in March and record low. The Composite PMI Output Index (services and manufacturing) fell to a record low of 7.2 from 50.6 in March. The country has been under a strict nationwide lockdown since March 25th. It is expected to last until May 17th.

Decoding Earnings Calls

Since companies aren't providing that much guidance for the current or upcoming quarters, we have to rely on the words they use in their conference calls with investors and analysts to decode what they are thinking. That's at least what two researchers from the Federal Reserve did in a new study. They scanned hundreds of recent earnings calls and looked for keywords associated with business decisions companies are considering. They plotted those instances against the same keywords executives used on earnings calls in the 2008–09 recession, to try and get a sense of the frequency of those words and the business decisions companies were making to stay alive.

The researchers, Andrew Y. Chen and Jie Yang, focused on words associated with credit line drawdowns, equity payout cuts, and investment cuts, since those were among the major hallmarks of the 2008–09 recession.

Here are the highlights:

Financial concerns appear to be worse in April 2020 than in 2008.
Some 42% of American public companies are discussing slashing investments, 27% are talking about equity payouts, and 17% are focused on drawing down on credit lines
This is two to three times as large as those seen during the peak of the 2008 Financial Crisis.
Financial concerns will continue at least through May.
Financial concerns did not dissipate in 2008 until 12 months after the crisis began.

A key difference between 2020 and 2008 is the severity and speed of the stock market decline prompted by the pandemic. In 2008, the crisis emerged in the financial markets and slowly bled its way across industries.

This recession will drive higher unemployment, most certainly, but will hopefully recover in fewer months than that of 2008–09. Here's the 2008 chart of worries:

How's ESG Doing?

Lost in the recent market madness is the hype around ESG (Environmental, Social, & Governance) funds. 2020 was supposed to be a big year for ESG and socially impactful investing, but that was before the pandemic. Concerns about climate change and investing in companies that combat it, or at least don't contribute to it, was becoming more important for investors of all ages, but particularly younger investors.

Turns out, the money has been flowing into ESG funds so far this year, and at a pretty good clip. According to Bank of America's Research team, flows into ESG funds have nearly quadrupled through 2020, especially in late March and April.

That coincides with the beginning of the most recent collapse in oil prices. It may not be the same money flowing out of oil into ESG funds, but the timing is interesting.

Top ESG Stocks Held by Mutual Funds

What's inside those ESG funds? I was wondering that, too.

The top ten stocks in the biggest ESG funds are an interesting collection of chemical companies and some of the biggest tech companies in the world. These are not the "green" companies that might come to mind when thinking about the environmental part of ESG, but they do score well across other ESG criteria, and some on the list have been the strongest stocks this year.

More News:

Square Earnings: What Happened

Penny Stocks to Watch for May 2020

Top Strategists on Where to Invest Now

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(chart courtesy YCHARTS)

Shares of FLIR Systems are up almost 10% following the thermal imaging camera producer's sales beating Q1 Wall Street estimates. Similarly, Activision Blizzard's stock price is up by 6% after the video game company reported excellent sales while consumers remain at home.

Shares of Occidental Petroleum are down by 12.5% amid the oil company's disappointing first-quarter results and continually mounting debt. Welltower's stock price fell almost 10% after the property insurance provider cut its dividend by 70%.

Word of the Day

ESG

Environmental, social, and governance (ESG) criteria are a set of standards for a company's operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company's leadership, executive pay, audits, internal controls, and shareholder rights.

photo courtesy NYT

Today in History

May 6th, 2010:

Shortly after 2:30 p.m. EST on May 6th, 2010, a flash crash began as the Dow Jones Industrial Average fell more than 1,000 points in 10 minutes, the biggest drop in history at that point. Over one trillion dollars in equity was evaporated, although the market regained 70% by the end of the day. Initial reports claiming that the crash was caused by a mistyped order proved to be erroneous, and the causes of the flash were attributed to Navinder Sarao, a futures trader in the London suburbs, who pled guilty for attempting to "spoof the market" by quickly buying and selling hundreds of E-Mini S&P Futures contracts through the Chicago Mercantile Exchange.

source: https://www.investopedia.com/terms/f/flash-crash.asp