The coronavirus pandemic has pushed the economy into a downturn of unknown severity. It could be a long recession or a sharp decline followed by a rapid recovery.
The stock exchange, which climbed 23 percent from its low, indicates that many investors expect a rapid rebound.
But that optimism will be tested in the coming weeks when large companies publish their quarterly financial results for the first three months of the year and predict the effect of the pandemic on their business.
“Profits season,” as it is known on Wall Street, usually only fascinates professional investors. And business executives, always reluctant to discuss issues, may be even less open about them now. But with millions of jobs at stake and businesses are closing every day, this deluge of information about the business, and any light it brings, will take on new significance.
Investors are already anticipating several epicenters of the economic pain. Oil companies, airlines, hotels, restaurants, retailers and automakers will report large losses and release forecasts for the coming months. Ford Motor, for example, said on Monday it would lose $ 600 million in the first quarter – not counting certain expenses like interest and taxes – down from a profit of $ 2.4 billion in the three first months of 2019.
Companies in these sectors lay off or lay off employees. This is where government aid could prove decisive – and executives, speaking on publicly available income calls, can reveal whether they will seek help from the Treasury Department and the Federal Reserve, and how much.
Some companies may be reluctant to take a big bailout. Offering government shares in return for its financial backing could shake up shareholders, who might fear that government involvement will reduce their ownership stake in the company. But companies that reject government aid or take too little may regret it later if their fortunes deteriorate further. Boeing executives, for example, have sent mixed messages about whether he needs government help. The aerospace giant was already in trouble before the pandemic because of the grounding of the 737 Max.
And while agreeing to a government bailout may help, there is no guarantee that executives will keep hiring at pre-pandemic levels. Certain types of aid may be accompanied by commitments to maintain employment, but only until the end of September. United Airlines, for example, suggested layoffs could come after September if the economy remains in a deep funk.
To monitor : Clarity from Boeing as to whether it will seek government assistance and be ready to give equity or something to the government in return.
A reality check on the stock market rally
If earnings disappoint investors and management’s forecast is worse than expected or disconcertingly inaccurate, stock prices could fall back to their recent lows. This would add to the sluggishness of the economy and question the government’s ability to revive the economy.
But some investors believe the earnings season could provide proof that a quick recovery is possible. “We see this as very transient,” said Timothy Fidler, who helps manage money at Ariel Investments, “a deep and unprecedented shock, but one that will heal itself – and heal itself quite quickly.”
Such optimism on the part of investors may seem irrationally exuberant while states like New York are still report hundreds of deaths per day. But traders make money when they accurately predict the future. And sometimes their optimism can also help jump-start the economy. This is because when business executives see stocks skyrocket and borrowing costs fall, they might be less likely to cut spending and hiring as much as when stocks crash.
To monitor : If stocks are selling strongly, look at what big companies said that day and what their executives said.
Banks really matter
This week, the six largest US banks report their earnings. Banks play a crucial role in the economy because they help finance spending by businesses and individuals. In the last few weeks they have already loaned billions businesses that have drawn on lines of credit to ensure they have sufficient liquidity.
If bank executives are concerned that a recession will make it harder for borrowers to repay loans, they will not lend that much money in the next few months, further weakening the economy. On Tuesday, JPMorgan Chase said it has set aside $ 8 billion for upcoming loan losses, and Wells Fargo $ 4 billion.
A worrying sign: Bank stocks have fallen by more than a third this year, compared to a 14.5% drop for the S&P 500. This means investors expect the sector to be hit harder than stocks. others.
It is important that banks stay healthy because the federal government relies on them as an intermediary to potentially obtain trillions of dollars in aid for businesses and individuals.
To monitor : Comments from bank executives indicating that they will be more cautious in granting loans.
Which companies are adapting to a new reality
It’s no surprise that the virtual lockdown of large swathes of the American population has dealt a heavy blow to the economy, which is driven by consumer spending. But investors are extremely interested in whether traditional retailers and restaurants will be able to survive and adapt to potentially huge changes in consumer spending priorities.
Some companies will offer important information about what Americans spend and what they don’t. For example, the Walt Disney Company was keen to highlight the increase in subscriptions to its Disney Plus streaming service, which have already exceeded 50 million worldwide in a few months. But it is not certain that the growth of this service could offset the collapse of major silver makers such as theme parks, cruise ships, ESPN and movies. Some analysts, such as those at JPMorgan, see “only a lingering impact on park attendance” due to the epidemic.
Of course, there will be real winners. Stock prices of Netflix, Amazon and Clorox, the maker of disinfectant wipes and bleach, have all risen more than 15% this year.
But it may take some time to see if the others will do well. And even in sectors affected by the epidemic, some companies could do better than others. In the restaurant industry, for example, some chains are more likely to thrive when most diners don’t leave the house much or at all. Chains with an established take-out and delivery business, such as Domino’s and Papa John’s, are growing rapidly thanks to online ordering, while other fast food businesses that rely heavily on the business of commuters, such as Dunkin ‘Brands, could have difficulty. They may need to change the way they do business if many people continue to work from home for months on end.
To monitor : Comments from business leaders on how consumer behavior is changing, and whether these changes could survive the pandemic.