The month of April was one of the strongest months in the market on record. All three major indices remain in negative territory for the year but April sure helped alleviate some of the pain. The DOW is -14.69% year-to-date (YTD) with April’s return clocking a very nice +11.08%. The NASDAQ is -0.93% (YTD) and was +15.45% for April while the S&P 500 is -9.85% (YTD) and finished April +12.68%.
We don’t think this positive trend will hold. The key takeaway from earnings season is that economically we will see much worse data for April, which will drive a much worse decline in GDP than the 4.8% annualized decline registered in the first quarter. No one knows, but we have seen projections from a negative 7% GDP to as bleak as negative 30% GDP.
We know that the price of a stock reflects the present value of future cash flow, over the entire life of that stock. The difficult thing to project in this environment is just exactly what that cash flow will look like over the next one or two years. The stock market recovery has largely been based on three ideas: 1) that the belief that the stimulus will provide a necessary financial bridge between the gap down in demand and the cash flows usually generated by that demand, 2) the economic reopening will provide clues to how quickly business activity can rebound and the degree to which society returns to normalcy 3) that there will be positive news from promising COVID-19 treatments.
Bloomberg reports that 41% of publicly traded companies benefit in this environment. These are companies that do not require humans to be physically present to utilize their goods or service such as Netflix and Amazon along with companies that provide consumer staples such as toothpaste and toilet paper.
The markets are not looking for the light at the end of the tunnel, only that it is less black. We know this: the economic impact will be extreme, we are certainly in recession, and we will certainly see bankruptcies. We expect it to be a messy road ahead with several false starts, a handful of peaks and valleys in the market, and most certainly not a linear path upwards.
Closer to home, the plunge in oil prices has been astounding. The uncertainty of business sustainability and credit Issues are the two biggest challenges for the Texas oil patch. According to the Oil & Gas Journal the U. S. Oil & Gas industry supports about 10.3 million jobs with about 40% of those in the state of Texas. Folks, that is about 4,120,000 jobs in the state of Texas, tied to the fossil fuel industry. There are large companies such as Exxon and Chevron that will make it through this. But, how many of their current employees will still be on the payroll in August? Those of us who are old enough and lived in west Texas remember the boom & bust of the late 70s and 80s. We predict that about 50% of the smaller business, those with less than 100 employees will not survive if this bust cycle takes longer than 6 months to recover. Analysts are predicting that if Texas does not reinstitute prorating and regulating the amount of production, it will take at least 3 years for the supply & demand equation to balance. The last time Texas instituted production regulation was in the 1970s & everyone that knew how to manage that is dead. This generation of oil and gas executives is in new territory, they will either learn to manage this new normal or they will not survive. The Houston Chronicle is projecting that Texas will lose over 700,000 jobs in the oil patch over the next 90 days.
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