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Market Commentary for the week ending May 16th, 2020

Summary

  • Stocks recorded their worst week since late April but the drop was relatively modest compared to weeks earlier in the year
  • Gold and Bonds rise as investors seek out these two safe havens
  • Retail sales plummet with a couple big name retailers entering bankruptcy

 

Retail Sales Plummet

Retail sales in April were down -16.4% compared the prior month and -21.6% compared to the same month a year ago. Economist had forecast of drop of just -12.5%. This April collapse follows a revised -8.3% drop in March making these back-to-back losses by far the worst decline in modern American history. As the accompanying graph shows retails sales are back to levels first reached more than 20 years ago.

Retail sales

Source: : St. Louis Federal Reserve: https://fred.stlouisfed.org. Advance Real Retail and Food Services Sales, Millions of 1982-84 CPI Adjusted Dollars, Monthly, Seasonally Adjusted

Every sector experienced falling sales except online which jumped +8.3%. Some of the biggest declines were in clothing stores down -79%, electronic stores off -60%, and furniture sales lower by -59%. Even grocery store sales fell in April by -13% following a jump in March due to stockpiling by consumers. A notable standout was home centers, such as Home Depot (HD) and Lowe’s (LOW), with sales declining just -3.5%.

Two big mall-based retailers, Neiman Marcus and J.C. Penney (JCP), entered bankruptcy this week. These are both companies that have been struggling and were unable to weather the current environment. It is expected that many retailers, certainly smaller companies, will face the same fate.

Interesting Numbers of the Week

Cost of Eggs

According to this week’s government report on inflation, the price of eggs jumped +31.8% during the month of April. The price of beef and veal were higher by +12.6% while nearly everything else fell in price.

Price of Eggs: +31.8%

COVID-19 Vaccines

Scientists and companies around the world are aggressively working on a COVID-19 vaccine with more than 100 vaccines in development according to the Wall Street Journal. In a sign of the urgency for a solution, it’s been reported that some companies that are normally fierce competitors are working together in a way never experienced. In addition, efforts are getting support from philanthropists including Microsoft founder Bill Gates committing $125 million.

In Development: 100+ Vaccines

Disney's “Hamilton” Deal

Disney (DIS) announced this week it will begin streaming the Broadway smash “Hamilton” on its Disney+ service starting July 3rd. Disney paid $75 million for the rights to distribute the move in theaters but has changed plans given the widespread stay-at-home orders. The company recently reported it had 54.5 million subscribers to its recently launched streaming service…a number some had forecast could take until 2022 to achieve.

Cost of “Hamilton” Rights: $75,000,000

This Week’s Performance Highlights

Market Indexes week ending May 15, 2020

Source: www.YCharts.com

Investor sentiment and prices reversed course falling in the most recent week while safe-haven investments such as gold and bonds moved higher. One of the negative influences in the market was Federal Reserve Chairman Powell’s comments in a speech suggesting there is continued risk to our economy and that will likely require additional support from the government. This concern is further reflected in the most recent survey by the Wall Street Journal of more than 60 economists forecasting the U.S. economy will shrink by -6.6% in 2020. A month ago the estimate was for only a -4.9% contraction.

  • Large U.S. stocks were down -2.1% as measured by the S&P 500. The Dow Jones Industrials suffered a slightly larger loss of -2.7% with the industrial sector one of the worst performing for the week. The NASDAQ held up better but was still down -1.2% and holds onto a gain of +0.5% for the year.
  • Volatility has been steadily falling from its mid-March high but remains more than double where it was at the start of the year. The below graph of week-by-week returns for the S&P 500 shows how the magnitude of change is meaningfully lower during the past 5 week. This is certainly a trend investors tend to favor but understand it can quickly reverse with no warnings.

    U.S. Large Stocks (S&P 500) week-by-week performance

    Source: www.YCharts.com

  • The healthcare sector was the only one higher for the week with stocks such as AbbVie (ABBV), Humana (HUM), and Bristol-Myers Squibb (BMY) among the best performers.
  • Small U.S. stocks were hit hard down -5.5% for the week after having rallied more than +35% from their March lows.
  • International stocks closed lower as well with developed countries down -3.0% and emerging markets off just -2.2%. Among the developed countries, the markets in France and the U.K. were among the worst performers down -5.4% and -4.7% respectively.
  • Real estate stocks suffered big losses this week down -9.7% leaving then down -31.9% for the year.
  • Gold and bonds were the week’s safe-haven investments up +2.2% and +0.5% respectively. Both of these investments have been bright spots in investors’ portfolios in 2020 with gold up +14.7% for the year and bonds higher by +5.0%.
  • Commodity prices also were fractionally higher for the week gaining +0.7%. Companies in the energy sector though are facing tremendous pressure with bankruptcy being the likely outcome unfortunately for many. Energy sector stocks were down -7.2% for the week and off -38.6% year-to-date.

Economic Indicators

The prices of goods and services fell in April as the economy contracted and demand weakened. The Consumer Price Index (CPI), the measure of retail inflation, declined -0.8% for the month with the biggest drop being in the price of gasoline down nearly -21%. In additional there were record drops in prices for clothes, auto insurance, hotel rooms, and plane tickets. The price of groceries were among the very few items increasing in price, up +2.6%, as demand has risen with more people eating at home. When stripping out the price changes for food and energy, known as the core CPI, prices were down a record -0.4% and the first time it has fallen for two consecutive months since the early ‘80s.

The Producer Price Index (PPI), a measure of wholesale inflation, fell by a record -1.3%, far worse than economists had predicted. Similar to the CPI, a steep drop in energy prices contributed to the overall decline. The price of services fell just -0.2%.

Industrial Production recorded a record fall of -11.2% in April reflecting the impact of factory closures and more.

Consumer Sentiment came in better than economists had forecast but certainly still off sharply from recent highs. In spite of the recent drop and unprecedented economic decline, consumers remain far more optimistic than they were during the lows of the 2008 Financial Crisis.

Upcoming Economic Reports

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  • Existing Home Sales
  • Initial Jobless Claims
  • Leading Economic Indicators

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