Stocks Slip on Oil

Oil prices drove markets lower this week as the West Texas Intermediate (WTI) crude oil benchmark hit a historic low. The May contract for WTI fell $55.90 on Monday to a history-making -$37.63 a barrel. The decline was driven by plunging demand for oil amid the global pandemic just as producers continued to pump supply into an oversupplied market with no excess storage capacity. By week’s end, oil prices rebounded on planned OPEC+ production cuts on May 1st and hopes that U.S. producers would soon follow in their footsteps. Stocks got a boost later in the week from steadier oil prices and the passage of a $484 billion government relief package, the second such package passed in recent weeks. The aid is directed towards small businesses, hospitals, and testing. Economic data remained dismal as another 4.4 million people filed for unemployment benefits, bringing the five-week cumulative total to 26.4 million. Meanwhile, existing and new home sales along with durable goods orders added to the growing pile of weak economic reports. For the week, the S&P 500 fell -1.32%.

Coronavirus Hits Real Estate Market

A healthy real estate market succumbed to coronavirus in March. Existing home sales fell 8.50% to an annualized 5.27 million units. The supply of homes fell a sharp 10.20% annually as sellers de-listed their properties, not wanting potential buyers touring their homes in person amid the pandemic. Sales of new homes also fell in March, falling 15.40% to a seasonally adjusted annual rate of 627,000 units. The declines are the beginning of what is to come: the real estate market is poised to remain weak with sellers wary of listing their homes for in-person tours and buyers hesitating to make offers amid rising unemployment.

Transportation Sector Pushes Durable Goods Orders Down

New orders for durable goods fell $36 billion or 14.40% in March to $213.2 billion, their biggest monthly drop since August 2014. The decline was driven by a sharp drop in aircraft, cars and spare parts as demand for transportation goods dried up. Aircraft and parts saw the biggest decline in new orders, falling more than $16.3 billion month-to-month for a 296% decline. New orders for automobiles and parts also fell, down 18.40%. Excluding the volatile transportation sector, orders were down a much more modest 0.20%, supported by a rise in defense spending. Not surprisingly, demand for durable goods are expected to remain under pressure as consumers and businesses alike continue to rein in spending.

Overall, stocks posted their first weekly decline in three weeks as the government’s second stimulus package failed to boost markets following the historic plunge in oil prices on Tuesday. The S&P 500 has managed to settle into a 2700-2800 range as we’ve now entered a bouncy transition period somewhere between the coronavirus panic of late March and the upcoming summer when the market is hoping the economy will be back open for business. Although consumers and businesses are eager to get back to normal, the reality is that the resumption in activity is likely to be measured. Asia, which is several weeks ahead of the U.S. and Europe in their crisis management, has already re-opened some businesses, but the combination of continued social distancing requirements and a wary consumer so far only reflects modest improvement. The quarterly earnings results that were released this week only underscored the unevenness of COVID-19’s effect. Stocks such as Procter & Gamble (consumer goods), Kimberly Clark (paper products), and Domino’s Pizza (food delivery) all posted strong results this week as individuals stayed home, stocked up and ordered in. Casino operators (Las Vegas Sands, Monarch Casino and Resort), consumer lending firms (Ally Financial, Discover Financial), and oil pipelines (Kinder Morgan) all suffered large losses as aggregate demand dried up and individuals have begun defaulting on their debts. In some way, Q1’s earnings season, and Q2 to a greater degree, will shape up to be a story of economic Darwinism. We are already seeing firms big and small alter their business and delivery models to accommodate remote interaction in the age of COVID. For those that can’t – like JC Penney, for whom this week it was reported is negotiating its bankruptcy – COVID is accelerating an already harsh reality with many notable brands at risk of extinction.

The Week Ahead