4/14/20 Market Notes
Stocks started the week with a volatile session as a new sell-off on the heels of a very strong week accelerated throughout the day, but did rally into the close. The Dow Jones Industrial Average was off by more than 500 points at its intraday low, but by the time the closing bell rang, the Dow only lost 325 points. The S&P 500 fell about 1%, while the NASDAQ rose 1/2% on the back of an 8% jump in Netflix share price, and Russell 2000 indexes lost 2.8%. Gold prices edged about 3/4% higher to end at above $1,750 per ounce. The benchmark Ten Year Treasury Yield rose to 0.762%, while the U.S. dollar strengthened a bit. The beat up consumer discretionary sector was positive most of the day, as investors scooped up perceived bargains, as the Communication Services and Technology sectors also rose. The Industrial, Materials, Financial and Utilities sectors all lost more than 2%. Earnings season is in full swing, and investors are getting a taste of how badly corporate earnings are being impacted by the coronavirus pandemic. While global macro strategists are forecasting a 20% to 30% decline in year-over-year earnings, there will be significant differences amongst the eleven sectors comprising the S&P. Below is a breakdown of how each sector is likely to be impacted:
Energy: The energy sector is likely to experience the worst earnings decline, with some analysts expecting as much as a 50% earnings decline. Stocks in this sector are already down sharply, but could fall further as dividends are cut or eliminated altogether.
Real Estate: Here we're really talking about Real Estate Investment Trusts, many of which have significant holdings in elder care, long-term care and other medically related facilities. Senior housing is also likely to take another hit, as will rental apartments as unemployment rises and people simply won't be able to pay their rent. One bright spot in the sector will be REITS with exposure to supermarkets, pharmacies and the like.
Consumer Discretionary: Major markets in Asia, Europe and North America have all but evaporated and are likely to last segments of the economy to come back, the sector is down sharply, giving some the impression that bargains are to be had. Homebuilders are part of this group (don't ask me why), Wednesday's April Home Builders Index could be telling or the group.
Consumer Staples: Toothpaste, cleaning materials, etc... are in greater demand now than ever, this sector could actually benefit from people staying home.
Industrials and Materials: These two sectors were already under pressure due to tariffs and an nearly year and half long trade war between the United States and China. The tariffs are still in place and supply chain disruption related to coronavirus are sure to have a further negative impact. One bright spot in the Industrial sector is the Aerospace and defense sub-sectors, which appear oversold as they've taken a tremendous hit.
Technology: Potentially another winner. Consumer demand for streaming services, cloud services for personal and business use, etc... are all up sharply. Some stocks in the sector reflect the growing demand, others appear to still be undervalued.
Communication Services: This sector is particularly tricky, as a rise in gaming and online services demand is not enough to offset the impact of closed theme parks, movie theaters, etc... Also, this is a segment of the economy that could see real price inflation.
Healthcare: This one is also tricky, while healthcare companies are shining stars right now, increased government price controls and regulatory headwinds could make this challenging going forward.
Financials: Low interest rates, higher unemployment and consequently defaults are likely priced into share prices. But the uncertainty of how long the crisis will last make this a tough sector to bet on.
Utilities: This 'safe haven' investment with strong yields should be relatively immune to the impact of coronavirus. Yet, the sector has been beat up like all the others, experiencing wild swings with little or no reason. Dividend cuts are very likely coming soon, so yield hungry investors should be careful and make sure to stick to high quality balance sheets.
Disclosures: This market commentary is written by the 1879 Advisors® and represents the views of 1879 Advisors®. This commentary is not investment advice and should not be used as a basis to make investment decisions. Please consult with your registered investment advisor before making any investment decisions.