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Stocks jumped higher in April – continuing to recover from the sharp losses into their March 23rd low. Despite today’s 288–point drop, the April gain of 11.081% for the Dow Industrials marked their 3rd best month since 1980 (only behind January 1987 and August 1982). That August 1982 11.465% gain of only 92.71 points marked the beginning of the greater bull trend that had extended to new highs in February. Going back 100 years, it was only the 21st best monthly gain. As trouble rules the day, it’s good to know that the best 6 monthly gains ever for the Dow were during the Great Depression. For the S&P, the 12.684% gain in April was second only to January 1987 over the past 40 years. However, by some measures now, stocks are as overvalued as they’ve ever been.

Unemployment is surging across the globe. Rates are falling. Deflation is threatening. Confidence is waning and central banks are easing as growth is stalling. The greatest debate is whether recessions will turn to depressions. Once again, this is not good news, but we’ll refrain from printing the volumes of repetitively bleak global reports. Recovery will require a turnaround that is still months away (without a cure or better action plan for Covid–19). While some stock markets have recovered, economies are in clear downtrends. Equities at times may lead a turnaround, but there must be some improvements in the data before optimism is warranted. It will only start with state and business reopening that can be safely sustained. The U.S. economy has now lost over 30.3 million jobs over the past 6 weeks.

Though the Bond Market Review declared a recession earlier based on forecasts, GDP for the first quarter fell from early estimates over 3% to drop to –4.80%. For some reason, the St. Louis Fed was projecting –15.26% while Atlanta and New York were nearer to –.4%. There are times when you needn’t wait on a textbook definition for recession to know there is no growth! The Atlanta Fed’s first estimate for Q2 is –12.1% and the New York Fed forecast –7.8%. With Personal Consumption dropping a record amount (from 1.80% to –7.60% in Q1), we’re in for a bumpy ride.

Over the past decades, there have been many times that the Fed’s message was unclear (or intentionally muddy). There were also times they seemed out of touch or wrongly positioned. However, they’ve been very much ‘on point’ since the release of the minutes from the March meeting. If there was disappointment from Wednesday’s FOMC April statement and presser, it was a lack of guidance. That was probably prudent – as a flat line near zero would not be very encouraging! This statement was clear (and we’ve included most of the changes versus March): “The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time.”

In what we deem a worthy assessment of current economic activity, they said: “The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions.” They continued: “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” The vote for this statement was unanimous.

If not now, when? Fed Chair Jerome Powell said: “This is not the time” to be concerned about the size of the federal deficit. He also said the Fed was not “in any hurry to move rates up.” Powell warned: “Economic activity will likely drop at an unprecedented rate in the second quarter.” He said the Fed was helping in places where they had never done before – and he was glad of it. He made the case that: “Our credit facilities are wide open.” In an argument we thought a little facetious coming from the greatest spender of all time, Powell said they were using “lending powers” as opposed to spending powers. The Fed is likely ‘stuck on zero’ (or maybe at times negative) through 2023!

No substantive action beyond low rate promises and a commitment to continue support for the economy was expected (or taken) by the FOMC. However, the Fed has slowed Treasury purchases over the past weeks – going from $75 billion on April 1st, steadily down to $15 billion per day last week, and to roughly $10 billion per day this week.

Looking Ahead

Equity cycles show stocks turning lower from a potentially–important peak near May 4th/5th.

Bond cycles show yields remaining low until an upturn due near May 8th/11th, then higher into the 21st.

Star Wars Day

May the 4th be with you? Our ‘GPS’ track for stocks has been working quite well – and it calls for a greater turndown near May 4th. Selling in early May has often been a widely accepted seasonal strategy for equities. While a great April is in the books, the ugly data from this past month will be rolled out over the next 2 months.

Treasuries, Agencies, and MBS

One has to wonder why the Fed wouldn’t have grown their balance sheet a little less or maybe a little more last week in adding $82.8 billion to take their total to a beastly $6.66 trillion? Nevertheless $7 trillion can’t be too far away. Last week, the yield curve ended up twisting flatter. Yields rose 2 and 1.5 bps at 2 and 5–years but fell 4 and 9 bps at 10 and 30–years. That twist reversed into today as 2 and 5–year yields dropped 3 and 1 bps and the 10 and 30–year sector yields rose by 4 and 11.5 bps (in a steepening move).

Last week, MBS spreads (FNMA 30–year 2.5%) narrowed by 5 bps. This week’s pre–FOMC Treasury auctions came at an 8–year low yield for the 2–year note, and record lows for the 5 and 7–year offerings. Monday’s $42 billion in 2–year notes came at .229%. Demand was the strongest since January 2018 and the buying group that includes foreign central banks accounted for 55.8% of the issue versus 55.2% in March. The $43 billion 5–year note auction, also on Monday, brought .394% (way under March’s .535%). Demand was the strongest in 5 years and foreign buying rose from 52.1% in March to 60.4% for this auction. On Tuesday, $35 billion 7–year notes were sold at .525%. Demand fell to last month though the foreign allotment rose from 62.4% to 66.4%.

4/24/20
Treasury Yield Curve

2-Year: 0.226@

5-Year: 0.374%

10-Year: 0.602%

30-Year: 1.172%

Weekly Yield Change +.021%

+.014%

–.041%

–.091%
Support 0.217/ 0.237/ 0.260/ 0.290

0.366/ 0.377/ 0.388/ 0.395

0.646/ 0.666/ 0.686/ 0.705

1.302/ 1.332/ 1.362/ 1.392%

Targets

0.197/ 0.177/ 0.167/ 0.157

0.351/ 0.343/ 0.336/ 0.329

0.606/ 0.586/ 0.566/ 0.546

1.242/ 1.213/ 1.188/ 1.163%

Economics

Initial Jobless Claims came in with a loss of 3.839 million and an upward revision of 15, 000 to last week’s totals – placing the 6–week plunge in jobs near 30.316 million. Though others are encouraged that the losses are fading, I still find them statistically significant – especially when you consider that while others correctly contended they are fading, the lesser numbers are coming out of a diminished pool of workers. Nevertheless, claims have fallen now for the past 4 weeks from their 6.876 million high. Continuing Claims, which lag a week, rose from 15.818 million to 17.992 million. There’s concern over the backlog of processing claims that the totals may be understated. The BMR forecast for the upcoming Unemployment Rate was 19.11%. The Congressional Budget Office is now estimating an average 14% over the second quarter.

Personal Income fell 2.00% in March, but Personal Spending plunged 7.50% – the most on record! That also set the annual contraction higher than during the financial crisis. Those numbers are not as evident in the March merchandise trade deficit (Advance Goods Trade Balance) which widened from $59.9 billion to $64.2 billion – the worst in nearly 3 years. U.S. exports fell 6.7% for their largest drop since 2008. Vehicle exports plunged and auto sales are also expected to have fallen to record lows in April. Wholesale Inventories fell 1.00% while Retail Inventories were .90% higher.

Confidence indicators are still falling – though taking a back seat to their tumbles of past weeks. Though with a smaller 1.9–point decline from 41.4 to 39.5, Bloomberg Consumer Comfort dropped for a 6th week – to the lowest reading since 2014. The buying climate was the worst since June 2015. University of Michigan Sentiment dropped from 89.1 to 71.8 – the lowest level since 2011. Their Current Conditions measure fell from 103.7 to 74.3 and Expectations retreated from 79.7 to 70.1. The Conference Board’s numbers were of equal concern. Consumer Confidence fell from 118.8 to 86.9 and their Present Situation tumbled from 166.7 to 76.4. However, the Expectations component ticked up from 86.8 to 93.8!

Dallas Fed Manufacturing Activity had already taken a hit to –70, though it fell further to –73.7. Richmond took a tumble with a drop from +2 to –53. MNI Chicago PMI (Purchasing Managers) fell from 47.8 to 35.4. Orders for Durable Goods tumbled 14.40% in March. Ex transportation, they were .20% lower. Orders for Capital Goods rose by .10%.

What little February data is left is now quite old – but ‘had been’ good news. Metro Home Prices (S&P Case-Shiller 20–city index) rose .45%, accelerating the annual gain from 3.12% to 3.47% (the highest since 2018). Their related Home Price Index increased from an annual pace of 3.88% to 4.16%. Those number are unlikely to stand for long as Pending Home Sales dropped by 20.80% in March – and were 14.50% lower on a year–over–year basis. The Fed’s favorite inflation indicator slowed greatly in March. The PCE Deflator dropped by .30% – leading to the annual pace falling from 1.80% to 1.30%. Ex food & energy, Personal Consumption Expenditures dropped by .10% – leaving the annual core .10% lower to 1.70%. The Employment Cost Index rose by .80% in Q1 2020. The Q1 GDP Price Index rose 1.30% with the core rate up 1.80%.

Friday opens May trading with March Construction Spending, and April data for ISM Manufacturing and Vehicle Sales. Monday (05/04) is set for Factory, Durable Goods, and Capital Goods Orders for March. Tuesday follows with the Trade Balance (deficit) for March and the service–sector outlook (ISM Non–Manufacturing). Wednesday brings MBA Mortgage Applications (which fell by 3.30% last week) and a clue into next Friday’s April jobs report from ADP Employment Change (private payrolls) where a drop of 20 million is forecast.

Equities

Whether stocks make higher highs into May 4th/5th or not, the cycles are looking weaker past that expected trend–change date. It may be appropriate to be defensive near May 4th by switching into cash or hedging portfolios. Last week, the Dow Industrials fell 467.22 points or 1.93% to 23,775.27. They are 2.40% better this week. The S&P lost 1.32% but was 2.67% higher into today. The Nasdaq was only off by .18% and then rallied 2.95% through today. The Dow Transports lost 1.72% but have rallied 3.52% this week. Bank stocks fell 1.39% but have surged 7.74% higher this week!

Dow:

Nasdaq:

S&P:

Resistance:  24,600 / 24,319 / 24,475 / 24,631

8,752/ 8,846/ 8,940/ 9,035

2,876/ 2,904/ 2,930/ 2,957

Support:

24,006/ 24,319/ 24,475/ 24,631

8,566/ 8,474/ 8,383/ 8,291

2,823/ 2,797/ 2,771/ 2,745

Other Markets

Japan just can’t seem to beat deflation and it’s once again troubling their economy. Tokyo inflation just fell .10% on an annual basis. Japanese Consumer Confidence also hit a record low. South Korea’s exports fell the most since the financial crisis. Auto sales are down globally. The Eurozone had 7 years of growth but has now contracted (by 3.8%) for the first time since 2013. South Africa’s debt ratings just fell to the lowest on records that began 26 years ago. The European Central Bank left rates unchanged but exercised a phantom cut in offering long–term loans as low as negative 1%! The ECB is facing similar problems to other central banks. They can’t get their governments to step up fiscal spending and can’t get banks to cooperate with lending.

Our cycles have Crude Oil higher into May 4th with another pop up to May 14th. After that, they suggest a low near June 1st. Crude Oil dropped 7.28% last week even after jumping back up from $6.50/barrel to close the week at $16.94/barrel. Crude rose 11.22% into today. Commodities lost 8.92% but have risen 3.94% this week. Gold gained 2.03% but has given back 1.70% this week. The U.S. Dollar rose .60% but has tumbled 1.40% this week. The Euro lost .48% but then gained 1.22%. The Japanese Yen rose .03% and then added .31% through today. Corn lost 2.02% and is off another 1.35% this week. Cotton gained 4.09% and is 5.70% higher this week.

“Horse sense is the thing a horse has which keeps it from betting on people.” W. C. Fields

“Learning to ignore things is one of the great paths to inner peace.” Robert J. Sawyer

Doug Ingram, Financial Economist

Additional Information is Available on Request