Stock Market Indexes were mostly down last week however volatility decreased as thoughts of re-opening our economy are top of mind! Last week, the Dow was down (1.90%), the S&P 500 (1.30%) with the Russell 2000 small cap index gaining .33%. Over the pond, the International Developed Market Stock Index, EAFE dropped (2.01%) and Emerging Market Stock Index slipped (2.30%). The 10 Year US Treasury finished last Friday with a yield of .61%, down from .73% last week.
Corporate Earnings/GDP Report
Believe it or not, we’re in the midst of 1st Quarter Corporate Earnings Reports. So far, approximately 120 S&P 500 companies have reported, with a forecast of a 15% DROP in 1st Quarter 2020 Earnings. Keep in- mind, many industries and business were running hard until March! This week, another 169 S&P companies will report. The challenge is the vast majority of companies cannot and will not provide any guidance, very simply because they don’t know. Certainly Health Care, Amazon and other services that cater to us staying put should fair well.
1st Quarter Gross Domestic Product (GDP) will be reported on Wednesday with the consensus calling for a drop of (3.9%). This number does not reflect 100% of economic data in the first quarter as the number gets adjusted 2 more times as data becomes firm. GDP is the figure used to determine growth, recessions, depressions, etc.
The Stock Market appears to be giving pause to Corporate America having a significant drop in earnings and the fact our economy (GDP) will shrink for at least 2 quarters in a row, throwing us into a technical definition of recession. The market is now suggesting an orderly and smooth process for the US Economy!! I certainly hope this is the case!!
4.1 Trillion + (Fed Balance Sheet)
$4.1 Trillion was the total assets owned by our Federal Reserve as of year-end 2019. Currently, the Fed is backstopping money-market mutual funds, mortgage markets, small/mid-size businesses, corporate debt and some state governments. There is a guess that the 4.1 Trillion will approximately DOUBLE by year-end 2020. Thank goodness interest rates are forecast to stay low for the foreseeable future along with a stable US dollar.
If and when interest rates rise, the additional cost will need to come from somewhere? Any guesses? Not Today’s Problem, At Least!
Will States Declare Bankruptcy?
Our states are obviously taking in less revenue from income taxes, sales taxes, tolls and other sources. This revenue is what runs the day to day operations of the states as well as services provided. Not to mention the prior pension obligations and health care promises made to many, are funded by annual incoming revenue. Last week the question arose, will US States declare Bankruptcy?
With a little research from Pimco, it appears in order for a state to declare bankruptcy, Congress would need to amend the federal bankruptcy code, certainly a challenge all to itself. States would also need to alter their constitutions and pass laws that provide Governors the actual authority to seek bankruptcy protection. Most believe this will not happen as our Federal Government will provide…….
Already available to states is the $500 billion Municipal Liquidity Facility and the CARES Act as provided by none other than our Federal Reserve. It certainly appears our states will be in need of much more $$$$$.