Good news vs. bad news: The tug-of-war facing markets over the next month
News is an interesting concept, in that information really only counts as news if it’s unexpected. On the flip side, information isn’t news if it is expected. April, however, is showing that even when the expectation is for bad news, the cumulative effect of so much negativity can still weigh on markets heavily. In other words, just expecting bad economic data does not necessarily make the market invulnerable to mountains of it.
Coronavirus news: More positive signs?
Broadly speaking, the economic and earnings data in most of the world is heading in the wrong direction, although in China - where the virus first surfaced - the data is now trending in the right direction.
However, when it comes to the path of the coronavirus itself, more positive news continues to emerge. In Europe, for example, it seems clear that the curve is flattening in the hardest-hit countries of Italy and Spain, while other European nations like Germany, France and Belgium are showing signs that the growth rate of the viral outbreak is slowing. While there continues to be daily ebbs and flows in the numbers, the trend toward an overall slowdown now appears to be in place. In addition, all evidence indicates that social distancing is having the desired effect of limiting the virus’ spread.
This is also the case in the U.S. Although America now leads the world in the number of coronavirus infections and deaths, the curve is flattening. Estimates for the total number of deaths that will occur in the U.S., although tragically large, are now beginning to drop from the worst-case scenarios. Of course, the ultimate path of the virus remains very difficult to forecast, and there is the very real chance that the outbreak could occur in waves. That said, the fact that governments around the world are actively discussing plans to reopen their economies, as China has done, is a very promising sign.
Economic news: Expectedly dismal
So far, in the U.S., over 16 million people have filed for unemployment in the last three weeks alone, with the likelihood that millions more will be joining them this week. Today, we learned that retail sales collapsed in March as the effects of social distancing wreaked havoc on retailer shops, restaurants and gas stations, to name a few.
Earnings season is also following suit, with most companies expected to report lower earnings in the first quarter, accompanied by negative guidance about upcoming earnings. The net effect of this in early trading today has been negative, but as we have said repeatedly, volatility will be the markets’ travelling companion for some time to come.
Global fiscal response continues to grow
Pushing against this wave of negative economic news is an increasingly larger global fiscal response. Just late last week, Japan and the European Union announced even more support. Meanwhile, in the U.S., the $1,200 direct deposits to lower and middle class wage earners are going out this week, while the first small business loan program applicants started to receive wire transfers on Monday. Although these programs are far from perfect, they are enormous in scope and demonstrate that real relief - especially to the hardest hit participants in the U.S. economy - is beginning to arrive.
The bottom line
Over the next month or so, markets are likely to be caught in a tug-of-war between hopefully good news - as it relates to the flattening of the viral outbreak curve - versus bad news pertaining to economic data. With this in mind, the only real news is likely to be hopeful signs that point to the outbreak slowly abating. The bad economic data is going to come regardless.