Daily Markets: Expect More Corona Cuts to Earnings Expectations
Today’s Big Picture
After gaining between 12.6% and 20.1% over the past few days, the major US equity index futures point to a modest decline at the open. European markets were up modestly by midday trading with the pan-European Stoxx 600 up 0.8%, the German Dax up 0.4%, the UK’s FTSE up 0.6% and Italy FTSE MIB up 0.6%.
Stocks in Asia closed mixed this morning, boosted by China’s better-than-expected PMI data, more on that later. China’s Shanghai Composite gained 0.1%, Hong Kong’s Hang Seng rose 1.9%, South Korea’s Kospi gained 2.2% while Australia reversed yesterday’s gains somewhat, falling 2.0%, and Japan’s Nikkei 225 also fell, dropping 0.9%.
Over the several trading days, we've seen an unprecedented number of companies rescind their earnings guidance in response to the coronavirus and efforts across the globe to restrain its spread. We've been sharing the growing number of store closures, layoffs, and worker furloughs as well as their extensions relative to original expectations. We have more of the same in today's Daily Markets note.
Odds are we will see more of such announcements in the coming days in retail and other businesses that are reliant on consumer spending. We've also seen manufacturing companies shut their factories and idle production where possible. In an effort to help individuals cope with the pain of the pandemic, financial companies are offering flexible terms for credit cards, mortgages and other debt-related payments. To up the gut-punch of the shutdowns in parts of the economy, we have the Saudi Arabia-Russia-US oil price war weighing on earnings expectations as well as capital spending in the oil patch.
Aggregating those downward revisions puts 2020 EPS expectations for the S&P 500 down just over 1%, which is a sharp reversal from the +10% YoY growth that was previously forecast for the back-half of 2020. Breaking that down, it equates to a 5.4% EPS drop in the first half of the year before recovering in the second half of the year.
Here's the thing, with so many companies pulling their 2020 guidance and the growing number of extended closures that are driving furloughs and layoffs, to say it's hard to determine if that 5.4% drop in first-half 2020 EPS is on the money let alone in the ballpark.
Based on what we are seeing and hearing from companies, our gut says that 5.4% needs to move lower and the expected rebound in the September quarter is likely to be adjusted lower too. This means the upcoming March quarter earnings season will be crucial in assessing the impact of the virus and efforts to contain it even if companies opt not to share specific near-term revenue and EPS projections. If we are right, and consensus EPS expectations move lower, it means the stock market is likely to become incrementally more expensive in the coming days, which could lead some to say stock selecting could become a tad trickier.
The silver lining for all of this is as economic activity resumes and people go shopping, travel, and dine out, 2021 could have very easy EPS and other comparisons as long as we don’t see another round of economic shutdowns.
As of this morning, there are nearly 790k confirmed cases of the coronavirus and 38k deaths. Spain reported the highest number of deaths since the crisis started. The number of cases in the US continues to accelerate well above that of Italy's, the nation with the next highest cases count. The US now has 1.6x the number of cases in Italy.
Yesterday's net new case report from Italy provided some much needed good news with the case count the lowest since March 10th. The daily net new case count looks to have peaked 10 days ago. The talk is now to slowly start opening up the economy after Easter, but the big question facing every nation in a lockdown of some sort is just: how? How to open up without risking another acceleration in cases that will require a second lockdown. The ramifications of the level of uncertainty two lockdowns would cause is too much to even contemplate.
Vietnam has joined the ranks of countries in shutdown, ordering a nationwide lockdown for 15 days, starting tomorrow.
Yesterday the People’s Bank of China reduced its 7-day reverse repo rate to 2.2% from 2.4%, the largest cut in five years, joining the host of other major central banks that have recently loosened policy significantly.
Both WTI and Brent oil prices are on track for their worst-ever quarter and monthly performances as the sector continues to suffer from the double-gut-punch of a pandemic-driven demand shock and an oil price war. Oil consumption has contracted by at least 25% from 2019 levels while supply keeps rising, which means global inventories could reach max capacity within a matter of weeks. Yesterday Brent futures dropped to their lowest level in 18 years and WTI fell below $20. Brent futures have lost more than 65% in the first quarter of 2020, the worst decline dating back to 1990. Brent is also having its worst-even month, down over 54% in March alone. WTI is down over 67% in the first quarter, its worst-ever quarterly performance and down 55% so far in March, worst-ever month.
South Korea’s Industrial Production rose 11.4% YoY in February (contracted 3.8% MoM) after the 2.6% decline in January and much better than the expected 2.3% expected decline. Manufacturing production rebounded by 12%. Retail sales fell 6% MoM and 2.3% YoY in February while Construction Output rose 5.6% YoY after the previous 6.1% decline. The nation looks to be getting back to business after having addressed the pandemic more forcefully than most with broad levels of testing.
Japan’s Industrial Production rose 0.4% MoM in February (preliminary estimate), down from the prior 1%, but better than the 0.1% expected. Industrial Production contracted 4.7% YoY, dropped from the 2.3% prior YoY contraction. Retail Sales in February rose 1.7% YoY, much better than the 0.4% decline and the expected 1.2% decline. Housing Starts in Japan fell 12.3% YoY, worsening from the prior 10.1% decline, but better than the expected 14.7% drop. Construction Orders slowed to a 0.7% increase in February, from the prior 17% increase. The bottom line is the data isn't awful in light of the pandemic, but as a major exporter, Japan is getting weaker and weaker.
The Official NBS PMI data out of China today looks surprisingly good. So surprisingly good that it is reasonable to question its accuracy. Manufacturing PMI rose to 52.0 (above 50 is expansionary) in March after having dropped to a record low of 35.7 in February, a substantial beat over expectations for an increase to 45. Non-Manufacturing PMI rose to 52.3 from a record low of 29.6 in February. Many sub-indices remain in contraction, new orders at 49.2, employment at 47.7, input costs at 49.4 and selling prices at 46.1. Business Confidence rose to 57.3 from 40. Uh-hmm. We'll just keep on eye on this in light of the other non-official data coming out of China that looks a bit less rosy. Needless to say, tomorrow's Caixin China General Manufacturing PMI for March should make for some interesting reading.
Inflation in the Eurozone rose just 1% YoY in March, 0.1% in Italy and 0.6% in France. France’s Industrial Producer Prices for products sold in France fell 0.6% MoM. In Italy, Producer Prices fell 2.6% in February YoY, the 8th consecutive decline - not a good position to be in as a global pandemic hits.
Later today we’ll get the usual Redbook data on retail sales for the week ending March 28th as well as the S&P/Case-Shiller home price report for January, Chicago PMI and the Conference Board’s Consumer Confidence for March.
Stocks to Watch
The Trump administration is expected to announce today that it will dramatically relax auto emissions and fuel economy standards so that only modest improvements are necessary through 2026. Fuel efficiency will only need to be improved by 1.5% fleet-average starting 2021 compared to the 5% gains required under the Obama administration rules. This could provide some help to the automotive sector by potentially reducing some costs.
Confirming suspicions of the virus and efforts to contain it would lead to restrained consumer spending, Visa (V) shared it has seen a sharp decline week on week with a meaningful deterioration in volume and transaction trends in the second half of March. "As countries have imposed social distancing, shelter-in-place or total lock-down orders, domestic spending, most notably in travel, restaurants, entertainment, and fuel, has sharply declined week on week with a meaningful deterioration in volume and transaction trends in the second half of March." Visa now sees its March quarter revenue growth in the mid-single digits and non-GAAP EPS growth in the low to mid-single digits.
Advertising and communications company WPP plc (WPP) pulled its dividend and share buyback plan as it suspended its 2020 guidance citing concerns over the impact of the coronavirus on client spending. Also withdrawing their 2020 guidance were:
Restaurant Brands International (QSR) says it can't estimate the duration or negative financial impact of the coronavirus pandemic on its business, but “expects it could be material.”
Air Canada (ACDVG) is cutting 85%-90% of its flights, canceling most of its international and U.S. routes, and temporarily laying off more than 15K unionized workers and furlough 1,300 managers beginning this week.
Announcements concerning the furloughing of workers were all the rage late yesterday and today impacting tens of thousands of workers. Retail facing companies who are furloughing workers in a bid to rein in costs as the coronavirus timetable is extended include:
- Macy’s (M)
- Gap (GPS)
- Kohl’s (KSS)
- Cato Corp. (CATO)
- Buckle (BKE)
- Ascena Retail Group (ASNA)
- Chuy’s (CHUY)
- The Container Store (TCS)
- Regis Corp. (RGS)
- L Brands (LB)
- Designer Brands (DBI)
- Steve Madden (SHOO)
- Tailored Brands (TLRD)
And then there are temporary store closures and suspensions:
- Cato Corp. has extended temporary store closures for two weeks, through April 16
- Chico's FAS (CHS) shared its stores will remain closed and has yet to determine when some or all of its stores may reopen
- Norwegian Cruise Line (NCL) announced an extension of its previously announced voluntary suspension of all cruise voyages to include voyages embarking between April 12 and May 10, 2020, for its three cruise brands
- Royal Caribbean (RCL) extends its Cruise with Confidence cancellation policy through Sept 1
- CNH Industrial (CNHI) withdraws its financial outlook for 2020 and suspends the majority of its manufacturing operations in North and South America
- Casper Sleep (CSPR) extended the closure of North America retail stores and is not expected to reopen until government and public health officials give the okay to do so
- Crocs’ (CROX) company-operated retail stores in North America will remain closed until further notice
- Ulta Beauty (ULTA) announced it will shut all of its stores until further notice
- Buckle (BKE) will extend the closures of its brick and mortar stores indefinitely
- Ford (F) pushed back the expected restart date for its North American plants and will announce its new timetable at a later date
- And you may want to sit down for this one as Gap announced last night it expects its stores in North American and Europe will remain closed beyond April 1 (tomorrow)
After reading those last two lists, we suspect readers will not be shocked to learn Moody's Corp. (MCO) Investors Service lowered its outlook on US corporate debt from stable to negative, saying that a coronavirus recession will result in rising default rates.
McCormick & Co. (MKC) reported better than expected quarterly EPS despite revenue for the quarter coming in a tad below consensus expectations. As your authors suspected, McCormick's consumer-facing business is expected to see an overall increase given coronavirus related pantry stocking and eating at home; however, given the difficulty in forecasting that business as well as the impact on its foodservice business the company has opted to pull its 2020 guidance. McCormick hopes to resume guidance when it reports its June quarter results.
After US equity markets close today, investors will be dialing into quarterly results from Blackberry (BB), PaySign (PAYS) and Verint Systems (VRNT). Readers looking to get the lowdown on those reports and others to be had this week should visit Nasdaq’s earnings calendar page.
On the Horizon
- Upcoming IPOs:
- For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
- Dates to mark:
- April 10: US equity markets closed for Good Friday
- April 28-29: Federal Reserve FOMC meeting
- April 30: European Central Bank rate decision
- May 12-14: Google I/O Developer Conference
- May 25: US stock market closed for Memorial Day
- Upcoming IPOs:
Thoughts for the Day
For our readers with families that include small children who are at home on lockdown, we thought we’d offer some sympathy.
"The trouble with children is that they're not returnable." ~ Quentin Crisp
McCormick & Co. (MKC), Visa (V) are constituents in Tematica Research's Thematic Dividend All-Stars Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.