On a special, remotely recorded edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Research Analyst Brian Yadao discussed the recent historic moves in oil markets, newly released macroeconomic data points and the outlook for first-quarter earnings season.
What drove U.S. oil’s plunge into negative territory?
On April 20, the price for May delivery of a barrel of U.S. West Texas Intermediate crude oil settled at negative $37—the first time in history that an oil futures contract went negative. However, Eitelman noted that very few contracts for May actually traded at negative prices—and that the volume-weighted average price for oil was actually positive that day. “The negative oil prices on April 20 were likely more of a fluke rather than a systemic issue for energy markets,” he stated, adding that prices for June and beyond are still significantly positive.
The overall volatility, however, is reflective of two main challenges confronting the energy market, Eitelman said: weak demand—due to government containment measures to limit the spread of the coronavirus—and last month's oil price war between Saudi Arabia and Russia. This has led to a significant oversupply of oil, triggering swift and significant declines in prices, he explained.
Looking beyond the short-term volatility, Eitelman believes that the oversupply issue is likely to clear up over time, in part due to production cuts recently announced by OPEC+. In addition, if global government containment measures are gradually lifted over the next few months, demand for oil could start increasing again as well, he said.
New data points to significant slowdown in global economy
Turning to recently released economic data, Eitelman said that preliminary PMI (purchasing managers’ index) surveys from April came in negative across the globe. “To put it bluntly, the numbers were horrible everywhere. Essentially, it looks like the global economy hit a wall in April,” he stated, adding that in several countries, indexes fell to all-time lows. While it’s important to note that these numbers were already expected by markets, they nonetheless serve as real evidence that the global economy has slowed in significant fashion, Eitelman remarked.
In the U.S., jobless claims for the week ending April 18 totaled 4.4 million—a number he characterized as very negative, although slightly less so than in previous weeks. All told, 26 million Americans have filed jobless claims in the past five weeks, suggesting that the U.S. unemployment rate is now around 20%, Eitelman said.
“Perhaps a more encouraging sign moving forward for markets is the aggressive measures governments have taken to significantly backstop impacted individuals by providing enhanced unemployment benefits,” he remarked. For markets, Eitelman noted, this may help offset the high number of jobless claims.
The U.S. Congress’ April 23 passage of a $484 billion relief bill is also a very positive development, he said, noting that the measure will provide more funding to the highly popular Paycheck Protection Program. The key watchpoint for markets going forward, Eitelman said, will be whether governments around the world maintain a whatever-it-takes approach to backstop impacted households and businesses.
Projections for U.S. first-quarter earnings season
Shifting to first-quarter earnings season in the U.S., Eitelman said that approximately 25% of S&P 500® companies have reported so far. Blended earnings results—which combine results for companies that have reported with estimates from those that haven’t—suggest a decline of 16%, year-over-year, he stated.
“While that’s quite a fall, it would be roughly in line with what we expect in a recessionary environment,” Eitelman said. A bigger watchpoint will be the earnings from mega-cap technology companies, which will be reported the week of April 27, he noted. “There’s been some thinking that these businesses may be more insulated than others from the economic impacts of the coronavirus,” Eitelman explained, “and if big tech companies are able to demonstrate this in their actual fundamental performance, that could be a positive for markets.”
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