with Brent D. Griffiths
The New York Stock Exchange’s trading floor reopened with a boom, as investors welcomed a limited number of traders back after a two-month absence by pushing the S&P 500 to a level it hasn’t seen since early March.
But many market players nevertheless remain stumped by the speed of the rebound in stocks amid the wider economic wreckage wrought by the pandemic shutdowns.
The S&P 500 remains down more than 8 percent this year, yet it has recovered 34 percent since bottoming out on fears of pandemic fallout back on March 23, three days after the floor went dark. The Dow Jones industrial average also surged 2.2 percent Tuesday, spending most of the day above 25,000 before dipping slightly at the close. And the tech-heavy Nasdaq, which nosed up 0.2 percent, is flirting with all-time highs.
Several pieces of good news are fueling the latest bout of investor optimism: Merck became the latest drug company to announce progress developing a coronavirus vaccine; economic activity is restarting as shelter-in-place restrictions lift; and the daily number of new infections continues to slide nationally.
Yet the market's march higher, which defies easy explanation in the context of the ongoing public health and economic calamity, has investors questioning whether it can keep going — or if it’s due for another correction if and when the scale of the damage comes into focus.
Here are four arguments for the durability of the rally.
1. The country's economic recovery could be faster than expected.
The bad news is undeniable — and staggering. Nearly 39 million people have lost their jobs in the past nine weeks. The official unemployment rate of 14.7 percent in April, a toll not seen since the Great Depression, is likely to surpass 20 percent this month. And it has come with a wave of bankruptcies wiping out household names — JC Penney, Hertz and J. Crew, among others — and mom-and-pop operations alike.
Yet some authorities see a relatively sharp bounce back taking shape. “You could see a fairly rapid recovery,” JPMorgan Chase CEO Jamie Dimon said Tuesday at a virtual conference hosted by Deutsche Bank. “The government has been pretty responsive, large companies have the wherewithal, hopefully we’re keeping the small ones alive.”
The bank chief “pointed to economists’ forecasts that show unemployment spiking to around 18% this quarter, then falling to 14% in the third quarter and declining to about 10% or 11% by the end of the year,” Bloomberg News’s Michelle Davis reports.
Dimon added a hint of caution about the possibility of an extended economic collapse. “If it does go on for a year, it won’t be very good,” he said. “You can’t prop up the stock market forever.”
St. Louis Federal Reserve President James Bullard likewise presented a relatively sunny outlook, telling Fox Business Network he sees a rapid recovery that drives the jobless rate back into the single digits by the end of the year.
2. The Fed’s unprecedented intervention has backstopped stocks.
As ugly as the economic downturn has been on Main Street, the Fed has pulled out all the stops, helping reverse the damage on Wall Street. The central bank’s actions — slashing interest rates to zero and moving to buy trillions of dollars in assets — are providing a massive amount of support to financial markets. Rosenberg Research’s David Rosenberg noted a symmetry between the Fed’s intervention and the market’s gains:
The $3 trillion that's been added in market cap since the stock-market low nearly matches the $3 trillion that the Fed has added to its balance sheet, says @EconguyRosie. "This IS an L-shaped recovery -- and the 'L' stands for 'liquidity.'"@CNBC— Carl Quintanilla (@carlquintanilla) May 26, 2020
University of Oregon economist Tim Duy also gives the Fed credit for powering the rally:
Goldman Sachs analysts, observing the scale of the Fed’s moves last month, reversed their bearish projections for stocks. Along with the economic rescue package Congress approved, monetary policymakers’ relief measures “mean our previous near-term downside of 2000 is no longer likely,” they wrote in a client note. “If the U.S. does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policymakers means the equity market is unlikely to make new lows.”
3. A surging tech sector is pulling the rest of the market up with it.
There's a reason the Nasdaq, alone among the major indexes, is in the green for the year. Technology companies have dramatically outpaced their rivals, as a number benefit from quarantine restrictions forcing more commercial and social interactions online.
“Big technology companies, which are heavily weighted in the indexes, have driven much of the rebound, continuing a trend that was prevalent during the nearly 11-year bull market,” the Wall Street Journal’s Gunjan Banerji noted earlier this month. “Five big tech stocks — Microsoft Corp., Apple Inc., Amazon.com Inc., Alphabet Inc. and Facebook Inc. — together make up about 20% of the S&P 500.”
4. The economy is experiencing a supply shock, which is less damaging than a demand shock.
New York magazine writer Josh Barro last week made the case that the nature of this economic crisis could make it easier to recover from than the Great Recession, a fact underlying investors’ bet in a turnaround. In the last downturn, he noted, the bursting of the housing bubble prompted people to stop spending, with effects that cascaded through the economy. Now, there’s evidence the constraint on consumers is coming at least in part from the other direction, as lockdowns ravage their ability to spend on activities like air travel and hotels.
"Negative supply shocks are bad for the economy,” Barro wrote. “But if you believe the supply shock will reverse itself in pretty short order — that much of normal life will resume in a few months, that it will be possible to fly to Cancun next winter and party on the beach — then you might be able to tell a better story about the economic outlook than you could if the recession were driven by a demand shock.”
Of course, coronavirus hasn't gone away — and a second wave of outbreaks could scramble the outlook.
But in the meantime, those trying to assess stocks’ values are facing challenges made even more difficult by companies withdrawing their earnings guidance.
“The market rebound has pushed the S&P 500’s forward-looking price-to-earnings ratio to 23.36, its highest level since 2002,” the WSJ’s Paul Vigna and Alexander Osipovich write. “But corporate profits are expected to remain under pressure until next year as sales tumble and expenses rise.”
As S&P Dow Jones Indices senior index analyst Howard Silverblatt told the paper, “If we see the upward turn in earnings, then the current levels may be justified. If not, the Street will need to reprice.”
Latest on the federal response
Mitch McConnell signals openness to new stimulus package.
But the details of his offer haven't really changed: “Congress will ‘probably’ have to pass more legislation … Senate Majority Leader Mitch McConnell said,” CNBC's Jacob Pramuk reports.
“The Kentucky Republican said a measure to lift the U.S. economy would have a more narrow scope than the $3 trillion package House Democrats approved earlier this month. He said states’ progress in restarting their economies in the coming weeks will help to inform what Congress does. McConnell noted that ‘we need to make sure we have unemployment insurance properly funded for as long as we need,’ as tens of millions of people lose paychecks.”
The focus is on small businesses for now: “Bipartisan legislation that would give small employers more time to take advantage of federal subsidies for payroll and other costs is expected to pass the House this week, as lawmakers return to Washington for an abbreviated two-day session,” the Associated Press's Andrew Taylor and Lisa Mascaro report.
“Senate Republicans are divided on the next steps and wary of another sprawling negotiation where Democrats and the White House call the shots. They are also split on a central element — how much aid to provide state and local governments and other coronavirus response after earlier relief bills totaled almost $3 trillion.”
A tax credit for businesses that keep workers is drawing bipartisan interest: “The House plan would give employers enough money to cover up to 80 percent of their wages and benefits, up to $45,000 per worker, plus a credit for fixed expenses like rent. Eligible companies would simply keep taxes withheld from employees’ paychecks. If that isn’t enough to equal the credit, they could get additional money from the Internal Revenue Service,” the WSJ's Richard Rubin reports.
“Smaller businesses would get the subsidy for all workers, while larger ones would get it only for furloughed workers still receiving wages or benefits. The break would be scaled to each employer’s revenue loss during the pandemic … A stand-alone tax-credit bill proposed by Rep. Suzan DelBene (D-Wash.) and Rep. Stephanie Murphy (D-Fla.), largely incorporated into the House package, has support from six House Republicans. Senate Democrats, led by Sen. Mark Warner (Va.), have proposed an even larger version that would offer up to 100 percent of wages and benefits up to $90,000.”
- What Republicans are doing: “Sen. Josh Hawley (R-Mo.) has been offering similar proposals. Some Senate Republicans, including Lindsey Graham (R-S.C.) have been seeking an off-ramp from the supplemental $600-a-week unemployment benefits. Republicans are considering other ideas, including bonuses for rehired workers and tax credits tied to hiring.”
Landlords received PPP money. They weren't supposed to: “The Small Business Administration specifically excluded companies that primarily develop or lease real estate … But they are aware of at least dozens of property companies that have received in aggregate tens of millions of dollars or more because of a legal loophole that allows them to apply through related business units, such as management companies or construction companies," the WSJ's Will Parker and Konrad Putzier report.
“This means SBA funds could flow to property investors, something that was never intended.”
From the U.S.:
- Pharmacies and drugmakers plan big push during flu season: They're “hoping to curb tens of thousands of serious cases that could coincide with a second wave of coronavirus infections,” Caroline Humer and Julie Steenhuysen report.
- Amtrak says it needs a $1.5 billion bailout: “The company … in April received $1 billion in emergency funding,” Reuters's David Shepardson reports. “Without the additional emergency funding, Amtrak said it would need to suspend some long-distance routes, and that others would operate on a thinned-down schedule. It would also need to greatly reduce its high-speed Acela service.”
- Cuomo says he'll meet Trump at the White House today: “Cuomo laid out a number of infrastructure proposals, including an expansion of New York City’s subway tunnels, while noting that federal approval would be required for the plans to move forward,” CNBC's Kevin Breuninger reports. Cuomo repeated his push for more federal funding for state and city governments, saying New York and its cities are “hard-stretched.”
The corporate front:
- Boeing and Airbus are studying how coronavirus behaves on planes: “Their work will involve academics, engineers and medical experts expected to examine new measures to prevent disease transmission on airplanes, according to the companies and people involved in their discussions,” the WSJ's Andrew Tangel and Alison Sider report. “Boeing said it is developing computer models that simulate the cabin environment.”
- CEO Jamie Dimon says JPMorgan is “very valuable”: “Dimon called the biggest U.S. bank ‘very valuable’ at the current price,” CNBC's Hugh Son reports. “Shares surged 7.9 percent to $96.58 after Dimon made the remarks.”
- Apple to reopen about 100 U.S. stores: “Under Apple’s new procedures, stores with walk-in service will require customers and employees to undergo temperature checks and wear masks before entering. Apple will provide masks to customers who have none,” Reuters's Stephen Nellis reports.
- Hedge funds plan extreme measures as they reopen: “Industry titan Millennium Management has a 50-point checklist for reopening offices that includes air filtration and an application process for staff who want to come in. Around town, rivals are discussing procuring infrared temperature scanners for entryways and plexiglass dividers to slide between desks,” Bloomberg's Hema Parmar reports.
Around the world:
- South Korea fights new outbreak at logistics warehouse: The country “added 40 new cases of the virus on Wednesday, its highest daily caseload in nearly 50 days, as an infection cluster emerged at a logistics facility run by South Korea’s biggest e-commerce company,” Min Joo Kim reports for Seoul.
- India braces for its reopening: “The resumption of domestic flights this week is a clear signal that India is moving to end the world’s largest lockdown, an unprecedented experiment that affected more than 1.3 billion people. The restrictions caused massive job losses, widespread food insecurity and an exodus of workers from India’s cities,” Joanna Slater and Niha Masih report from New Delhi.
Whistleblowers allege Facebook isn't telling shareholders about illegal activity.
They level the allegations in a complaint filed late last night: “ A consortium of Facebook insiders and critics filed a confidential whistleblower’s complaint to the Securities and Exchange Commission, claiming the social media giant is aware of illegal activity on its platform, such as the sale of opioids, and has failed to properly police it,” Nitasha Tiku reports.
“The complaint, which was obtained by The Washington Post, includes dozens of pages of screenshots of opioids and other drugs for sale on Facebook and its photo-sharing site Instagram, with some having seemingly obvious tags such as ‘#buydrugsonline.’ It also notes that Facebook has a pattern of taking down content when it is pointed out by media or activists, only to have it reappear later. The filing is part of a campaign by the National Whistleblowers Center to hold Facebook accountable for unchecked criminal activity on its properties. By petitioning the SEC, the consortium is attempting to get around a bedrock law — Section 230 of the Communications and Decency Act — that exempts Internet companies from liability for the user-generated content on their platform.”
- The company's response: “In a statement to The Post, Facebook spokesperson Joe Osborne said, ‘We can’t comment on the substance of a complaint we haven’t seen, but we’ve regularly disclosed potential risks related to content in our SEC filings, including at least four times in the last year.’”
Warner Music set to kick off $1.8 billion IPO: “Warner Music, the world’s third-largest recording label and home to artists including Cardi B, Ed Sheeran and Bruno Mars, set a price target of $23-$26 per share for 70 million Class A shares, the company said in a regulatory filing. At the top end of the range, the IPO would value Warner Music at $13.26 billion,” Joshua Franklin and Noor Zainab Hussain report.
“Warner Music, majority owned by billionaire Len Blavatnik’s Access Industries, is not selling any shares in the listing, with the offering made up entirely of existing shareholders selling stock, a rarity in IPOs.”
Aston Martin replaces CEO amid struggles: “The replacement of Chief Executive Andy Palmer with Tobias Moers, the chief of Daimler AG ’s AMG performance brand, follows a string of disappointments at Aston Martin. Palmer’s efforts to revive the brand had faltered and the company’s share price has slumped since a lackluster initial public offering in October 2018,” the WSJ's William Boston reports. “After Tuesday’s announcement, the company’s shares surged 43 percent.”
- HP and Ralph Lauren are among the notable companies reporting their earnings
- The House Education and Labor Workforce Protections Subcommittee holds a hearing on protecting workers during the pandemic
- Land O'Lakes CEO Beth Ford speaks during a Post live event on the future of the food industry
- The Labor Department reports weekly jobless claims
- Costco Wholesale, Nordstrom, Dollar General, Ulta Beauty, Abercrombie & Fitch and Burlington stores are among the notable companies reporting their earnings
- Jet Blue CEO Robin Hayes speaks during a Post live event on the future of travel
- Former Treasury Secretary Larry Summers speaks during a Post live event about the state of global economy
From The Post's Tom Toles: