April 26, 2020, Weekend Market Thoughts by Matthew Somberg

Sunday, April 26, 2020

 

Dear Friend,

We hope you had a nice weekend and that this email finds you and your family well. To our clients on the front lines fighting Covid-19 and helping fellow Americans, we thank you again for the good work you are doing.

For the last two months we have used Sunday evening as an opportunity to reflect back on the week that was, and to look ahead to what will happen in the coming week.

Last week

  • The Dow Jones Index declined 1.9% and is now down 16.7% since January 1st
  • The S&P 500 declined 1.3% and is now down 12.2% since January 1st
  • The NASDAQ declined 0.2% and is now down only 3.7% since January 1st

There were three notable economic headlines from this past week:

1.      Oil

You may have seen a headline early last week stating that oil prices had become negative for the first time ever. This does not mean that oil became worthless or had negative value. The headline referred to a specific May 1st contract for oil delivery from West Texas in which those delivering the oil would have actually paid those receiving the oil to take it off their hands. Essentially, it would have been like going to the gas station and having the attendant pay you money to fill your gas tank.

How could this be?

Forty percent of the consumption of oil in the United States comes from car and truck fuel.  With our economy at a standstill, automobile use has come to a halt, yet oil production around the world continues at a fast pace. We already had an excess supply of oil prior to the Covid-19 economic shutdown, and we now find ourselves with historically low demand. When supply is high and demand is low, prices of any good or service go down.

I thought low oil prices was good thing.  Why didn’t the market go up?

In a booming economy, low energy prices are welcomed. If you are filling up your gas tank or heating your home for winter, low gas and oil prices are tremendous. Since most Americans are staying home and we are beyond winter weather, unfortunately there is little advantage for low oil prices right now. Two of the 30 companies in the Dow Jones 30 are energy companies (Exxon and Chevron) and roughly 4% of the S&P 500 companies are in the energy sector. Energy sector stock prices have declined by 43% year to date.

2.      Unemployment

Another 4.4 million Americans filed unemployment claims last week. That brings the total of unemployment claims to 26.5 million in the last five weeks. We have gone from a historical low of 3.5% unemployment in early February to now exceeding 20%. There are now approximately 33 million Americans that are searching for employment. For perspective, over 15 million Americans were out of work at the high point of the 2008-2009 Great Recession.

3.      States Reopening for Business

As mentioned last week, governors from different regions of the country are beginning to discuss slowly reopening their economies.  While social distancing appears to be the best way to stop the spread of the virus, there does not appear to be any way to stop the spread of unemployment without allowing businesses to begin to open in some capacity. This will be a very difficult balance – containing virus spread as we are now past 55,000 deaths and containing unemployment as we are now past 33 million unemployed.

The week ahead

We are in the middle of earnings season, so each week we learn how companies performed in the first quarter and of any guidance they can share about their future earnings. This week we are hopeful for positive news from companies such as Amazon, Microsoft, Facebook and Apple. In fact, those four companies, along with Google (Alphabet), make up 20% of the S&P 500. As those companies go, so goes the S&P. This is a very big week for the S&P.

Gilead Science is a drug company that created a drug called Remdesivir, one of the most promising treatments for those infected with Covid-19. Remdesivir is being evaluated in multiple late-stage clinical studies that were designed to achieve statistically significant results. We expect to hear more from Gilead this coming week on their latest results.

We wish you a good Sunday evening and a healthy week.

 Sincerely,

Matt Somberg

Matthew A. Somberg, AIF®
Accredited Investment Fiduciary®
Co- Founder and Principal