| Monday's Headlines 1. US markets rally despite China tensions and weekend of protest 2. How the biggest companies are responding to the protests 3. US, China, and European manufacturing indexes post slight bounce 4. ROE falls to three-year low 5. Where we stand Markets Closed
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Markets Today U.S. markets climbed another wall of worry today to reverse early losses and post gains that intensified into the close. The DJIA closed higher for the first time in three days, and the Nasdaq and S&P 500 extended their gains from Friday. The Nasdaq is just 2% below its record highs set in February.
This weekend's protests against police brutality—most of them peaceful—had little impact on investor sentiment, although the consciousness of the country, and the entire world, has been shaken. Companies are responding with powerful messaging and efforts in yet another example of businesses taking moral and ethical stances.
Global markets also rallied for the most part, as manufacturing reports out of China, the U.S., and Europe showed slight upturns as those economies come back to life. Chinese government officials reportedly told major state-run agricultural companies to pause purchases of some American farm goods, including soybeans, as Beijing evaluates the ongoing escalation of tensions with the U.S. over Hong Kong. Expect the White House to address that, eventually.
Still, the momentum remains in both the Chinese and U.S. stock markets—two of the best performers so far this year. Over the past 12 months, the S&P 500 has posted a 13% return. That's higher than its historical average, and it comes amid the worst economic disruption this country has faced in decades.
chart courtesy Bespoke Investments  Headlines:
 Return on Equity Plunges to Three-Year Low Since 2020 is likely to be a washout for corporate earnings, investors are compelled to look at other fundamental metrics as they seek price discovery for stocks. Those don't look so hot either, especially return on equity. The S&P 500 return on equity (ROE) plunged to its lowest level in three years in the first quarter as profit margins, a main component of ROE, disappeared. Margins had their second largest quarterly decline since 1970, and March was the only month impacted in the first quarter.
Goldman Sachs predicts margins will decline to 8.7% for the S&P 500, the lowest level since 2010, but will eventually rebound toward their record high of 11.2% in 2021. They should be helped by lower interest rates (which bring borrowing costs down) and lower wage costs. But those could be offset by health safety costs, supply chain restructuring, and revenue challenges as the economy recovers.
The bottom line is that business balance sheets are broken, especially in sectors like transportation, leisure, retail, and hospitality. Investors are making a very long-term bet that those balance sheets will be rebuilt as strong as they were before the pandemic.  chart courtesy MorganStanley
Maybe it's the Dividends? With plunging ROE across S&P 500 companies and little earnings guidance, the hope for a future boost in dividends may be what's keeping bullish investors around. Many companies slashed or eliminated their dividends when the pandemic began, but the expectations for future increases have been growing, according to Morgan Stanley.
In fact, the S&P 500 has more closely tracked dividend futures than it has earnings estimates for the next 12 months. Dividends tend to be more resilient during recessions than earnings, and this year will definitely prove that out. If companies are able to recover, they are likely to restore and even increase their dividends (like Apple just did), which will entice even more investors back into the pool.
chart courtesy MorganStanley  But it May Still be Choppy for Awhile If the history of stock markets and recessions has taught us anything, it's that markets don't follow straight lines in crashes and recoveries. While the U.S. stock market has bounced 36% off its lows in 2020, it did something similar in 2009 and in 2003 before falling again. Usually that's when the euphoria dissipates, traders take their money off the table, and the economic realities of badly damaged economies set in.
You can see that playing out this time around, except for one key fact: About $4 trillion left the stock market in early March in search of safe havens like gold, savings accounts, and money markets. It has missed this rally, and may not want to sit on the sidelines for much longer.  Where We Stand At Investopedia, we believe every person deserves an equal opportunity to empower their financial future. Racism and hate have no place here. Let's take action against injustice.
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(chart courtesy YCHARTS)  Shares of Coty are up by 22% following the investment firm KKR acquiring a 60% stake in the beauty company's hair and nail brands. Gap's stock price rose by over 11% after JPMorgan upgraded the clothing retailer from "underweight" to "neutral."  Shares of Pfizer fell 7% after a trial for its breast-cancer drug fell short of expectations. Similarly, Gilead Sciences' stock price fell by over 3.5% after its remdesivir drug showed only a minor benefit for COVID-19 patients. Word of the Day Return on EquityReturn on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company's assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of how effectively management is using a company's assets to create profits.  Benjamin Graham/Investopedia
Today in History June 1, 1932: Benjamin Graham publishes the first of a three-part series of articles in Forbes Magazine in which he points out that "a great number of American businesses are quoted in the market for much less than their liquidating value; that in the best judgment of Wall Street, these businesses are worth more dead than alive." On the very same day, the Standard & Poor's 500-stock index (measured retroactively) hits its all-time low of 4.40.
Benjamin Graham, "Inflated Treasuries and Deflated Stockholders: Are Corporations Milking Their Owners?" Forbes, June 1, 1932.
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Monday, June 1, 2020
Climbing the Wall of Worry
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