- April 17, 2020
- Blog , The Portfolio Strategist - Terry Gardner
Markets Recover but Leadership from Financials is Missing – YouTube Video & Transcript
In this video, In this video, Terry Gardner, Portfolio Strategist at C.J. Lawrence, reviews the stock market’s three peaks cycle in dealing with the coronavirus, examines recent economic and corporate data, and addresses the market’s recent leadership.
Video Transcript
Terry Gardner:
Hi, good afternoon everyone. It’s Terry Gardner from C.J.Lawrence, on Thursday, April 16th. Hope everyone is healthy and safe. In this week’s video, we want to address three topics. First being, we want to take a look at where we are in our triple peaks market scenario. Second, we want to take a look at the real-time economic data that’s been coming in, to try to gauge the impact that the coronavirus is having on the economy. And then thirdly, we want to address the recent stock market rally, and discuss leaders and leadership.
Terry Gardner:
So first off, with regard to our triple peaks stock market scenario. As we’ve discussed in the last couple of videos, there’s three phases that we believe the market needs to endure. First being peak panic or fear, second being peak virus, and the third being peak negative news. We think, and we mentioned in the last week’s video that we’ve passed the peak fear or peak panic phase, and we’ve moved into the virus phase. Here in New York, and we got word today that we’re extending our shelter in place mandate for another two weeks, till mid May. By looking at the numbers, it appears that the expansion or the growth in the virus numbers perhaps has peaked or plateaued, so we’re hopeful in that regard.
Terry Gardner:
Now we’re starting to get into the economic and corporate impact of the virus, what’s happening in businesses. So let’s dig into that a little bit. In terms of the negative data that we’re watching, there’s really three buckets. One being economic data, second being corporate data, and the third being what we like to look at, are some real trends in the freight and services economy.
Terry Gardner:
So first off, with regards to economic data, it’s coming in quite negative, breathtaking in some respects, but fairly close to what’s expected, given the circumstances. Today we saw jobless claims come in at record numbers. Now taking the four week cumulative jobless number to 22 million, which essentially erases the job gains that have been achieved since the last recession, which is quite remarkable.
Terry Gardner:
The Philly Fed Manufacturing Index today came in at a negative 56.6%, which is below recession levels, showing a real contraction in manufacturing activity, and housing starts and building permits both slumped in the past couple of weeks. And finally, the Bloomberg Comfort Index, which we like to watch, fell to its weakest level since October of 2016. On the corporate side, S&P companies, S&P 500 companies are starting to report their first quarter earnings. We’ve been waiting for that. 35 companies have reported to date, and 36% declines have been the average of those companies that have reported, for earnings per share in the first quarter. That’s quite remarkable to us, given that March only represents a third of the quarter, and we wouldn’t have expected the impact to be so deep in the first quarter.
Terry Gardner:
Second quarter expectations have now fallen to a point where analysts expect corporate profits to contract by 25% in the second quarter. That’s down from a plus 5% at the beginning of the year. We would expect that expectations for the third quarter would drop even further. So we’re watching those estimates come down.
Terry Gardner:
Then thirdly, with regard to real economic trends, we like to watch a lot of the freight indices to see what’s moving in the economy, what’s on the road and the rails today. What does economic activity look like? The railcar loadings, which reflects not only the conventional railcars, but intermodal railcars, which are shipping containers that are moved along freight railroads, those numbers are down 20 to 25% on a year-over-year basis. Likewise, the air freight index, it’s put out by the AITA, is down 23%. The American Trucking Associations truck tonnage index isn’t out yet, that’s expected in the next week. But I think the bottom line is that in terms of the freight economy and goods shipments, what we’re seeing is a 20 to 25% decline. So we’ll watch that number.
Terry Gardner:
But the bottom line is that we are now in the throes of the first wave of negative economic and corporate data that’s impacted by the coronavirus, and it’s quite dramatic. But at the same time, it’s interesting to see that the stock market is digesting that data, and has held in there quite well, and has taken a lot of that news flow in stride. So that’s a positive sign.
Terry Gardner:
So finally, let’s take a look at our final point here. It’s a market internals, for some insights to whether this recovery’s got some legs. So first off, we’re down about 17% from the peak that the S&P 500 achieved in February. We’ve actually rebounded 25% off the bottom from just a couple of weeks ago. So quite a remarkable comeback. I think it’s important to look inside that recovery to see what the market internals show, and what groups were providing leadership. Over the last couple of days, I thought it was interesting to note that on the big updates, particularly that we saw on Tuesday, the leaders were companies that were really rebounding off of a dramatic decline, like hotels and cruise lines.
Terry Gardner:
In fact, if we look a little bit further back over the last couple of weeks to see which groups have performed or underperformed, many of those groups have performed well, off the bottom. That suggest to us that the most recent recovery might be more technically based than fundamental outlook driven. Month to date, leader groups include internet retail, which is up 17.5% just in the last couple of weeks, and that is understandable, given that internet retail includes Amazon, which has done particularly well, but it also includes the OTAs and travel companies like bookings.com, which you would expect to be weak. Multi-line retail has had a great month so far, up 14%. And even hotels, restaurants and leisure groups are up 10%, all leading the market. Meanwhile, even energy is up 10%, while financials and industrials have both lagged.
Terry Gardner:
When you see a recovery in both the economy and the market, you like to see the financials lead. The financial stocks tend to reflect the underlying health of the economy, and the credit system and the financial system and the health of the consumer, as well. So you typically would see the banks, after a big downdraft, start to do particularly well. Followed then by the industrials, reflecting somewhat of a recovery in the industrial economy. We’re actually seeing the opposite. We’ve seen these beaten up groups rally off the bottom, and we’ve seen financials and industrials lag. So to us that suggests more of a technical recovery, more than a durable market broadening recovery, for the S&P 500.
Terry Gardner:
Having said that, if you look a little bit deeper into some of the names that have done particularly well, I think that also provides some insight. So when we looked at year to date, and even since the peak in February, a couple of names continually come to the top, and they’re names that we’ve talked about as being leaders, innovators. Names like Regeneron, Amazon, Microsoft, Adobe, Costco, S&P Global. Those are all names that are in the top bracket of performers, year to date, and since the market’s peak in February.
Terry Gardner:
So we think the message that the market is giving us is pretty clear, and that while the worst may be behind us for the indices, there still may be some volatility ahead. And rather than trying to time the market, pick the market, pick industry groups, we continue to want to focus on the leaders, the innovators, the market share gainers. And that’s what the leadership board is showing us. So if you’ve got any questions about our work, please feel free to give me a ring at 212-888-6403, or shoot me an email at tgardner@cjlawrence.com. Hope everyone’s well, look forward to speaking with you next week.