Crude Oil Bounce Gives Energy Stock A Lift As Market Volatility Ebbs

In addition to some optimism from the House’s approval of a second round of funding aimed to help the economy, stock market participants also seem to be taking some cheer from the continued rebound in oil prices after a futures contract earlier in the week plunged into negative territory. This morning West Texas Intermediate crude is up more than 3%, building on gains from the previous two sessions. 

Yesterday, energy stocks were by far the best performing sector amid the rebound in oil prices. However, the bounces in crude futures and energy stocks are from very low levels—the S&P 500 Energy Index (IXE) is half of what it was at the start of the year and, despite a three-day crude rally, the West Texas Intermediate crude oil futures contract for June delivery (/CLM20) is trading around $17 per barrel, down from around $60 at the start of the year. Though the market may be seeing some light at the end of the tunnel, global demand is expected to remain muted from the economic impact of coronavirus. And until recently, major producers hadn’t agreed on a production cut that would help support prices. 

As part of the global economic fallout from the pandemic, business confidence in Germany plummeted to a record low amid a slump in services and manufacturing. In the United States, jobless claims numbers out yesterday, combined with the staggering job losses we’ve seen recently, could put the domestic unemployment rate of around 20%, Bloomberg reported. 

Those are just some of the signs of the toll the pandemic is taking on the global economy. But traders and investors seem to be thinking that having data, even if it’s bad, is better than having the high levels of uncertainty we saw in the middle of last month. Global stocks overall have been staging a comeback.

Durable Goods and Corporate News

In the latest piece of economic data from the United States, durable goods orders for March fell more than expected. They dropped 14.4% when a Briefing.com consensus had expected a 10% decline. Excluding transportation, however, painted a stronger picture. That number fell just 0.2%, versus a 4% decline expected in a Briefing.com consensus.  

In earnings news, Verizon Communications VZ earnings beat Wall Street estimates but revenue disappointed, and the company trimmed its outlook for the year. Meanwhile, American Express Company AXP said its quarterly profit dropped sharply as it set aside more than $2 billion to cover potential losses from credit card payment defaults. That’s similar to moves we’ve seen major banks take to prepare for possible coronavirus related loan losses. 

On another note, CNBC reported last night that Google parent Alphabet Inc. GOOG GOOGL would be slashing its marketing budget by as much as 50%, according to an internal release. A company spokesperson later confirmed that some areas’ budgets will be cut, but that others might not. As GOOGL prepares to report quarterly earnings next week, this emerging storyline might be one to listen for during the conference call Monday afternoon. Also, it might be worth watching how this action might reverberate across the Tech and Comms sectors.

Home on the Range

One hopeful sign that has emerged in the market is that participants are once again able to talk about support and resistance in a meaningful way. It seems that the market has set a range for the time being—roughly between 2750 and 2880 in the S&P 500 Index (SPX)—which is a lot more comforting for investors than the market dynamics back in March, when stocks hitting their up or down limits on a somewhat regular basis, and adding to the uncertainty. See chart below.

It’s true that the oil scare this week has been a trigger of uncertainty, but as oil rebounds, jitters on Wall Street appear to be lessening. The CBOE Volatility Index (VIX) has eased back toward 40 again, indicating that nervousness is still elevated compared to what we witnessed in the early part of the year but is well below its coronavirus peak above 80 last month. 

One thing that seems to be helping to soothe investors is the amount of data that we’re getting. To be sure, the jobless claims numbers have been bad on a historic scale. But at least they are providing clarity, whereas in the middle of last month investors were dramatically selling equities in part because they simply didn’t have a handle on how bad things could get. Now, it seems like we do.

Thursday’s jobless claims offered another staggering figure well into the millions. But the 4.427 million initial unemployment claims for the week ended April 18 represented a drop of more than 800,000 from the downwardly revised figure for the previous week. 

Testing the Still-Muddy Waters

With more of a grasp on what the coronavirus means for the economy, investors seem to be more willing to wade back into stocks. 

It’s arguable that that willingness to buy could bode well for a continued market recovery as the money currently sitting on the sidelines finds its way back into equities as the nation gets back to work and retail sales recover as shops reopen.

With that backdrop, investors started out Thursday in a buying mood. 

But stocks pulled back – with the SPX and Nasdaq Composite (COMP) ending slightly lower and the Dow Jones Industrial Average ($DJI) posting a marginal gain—after the World Health Organization posted a draft document saying a clinical trial in China didn’t show patient benefit from a potential COVID-19 treatment, remdesivir, made by Gilead Sciences, Inc. GILD. 

Investing in a PotentialTreatment

But GILD said results of the trial were inconclusive because there weren’t enough participants. There are also other ongoing studies of the drug.

Still, the increased doubt about one of the forerunning potential treatments for COVID-19 provided the market with an alarming reminder of the hurdles the population still faces from a disease without cure or approved treatment.

 GILD shares took it on the chin—falling some 8% before recovering somewhat—but are still up 20% on the year. It’s an important reminder that biotech investing can be volatile, especially with something like the current race for a coronavirus treatment. A number of firms—from biotech upstarts to so-called “big pharma”—are in the running, and GILD is but one of the frontrunners at this point. Trading on emotion and rumor can be a dangerous endeavor.    

CHART OF THE DAY: TIGHTENING UP? While the daily movement in the S&P 500 Index (SPX—candlestick) is still a far cry from the pre-pandemic times earlier in the year (blue channel), it's also beginning to feel like the SPX has established a trading range roughly between 2750 and 2880 (red channel)—a sharp contrast to the heady days of March. Might we see further consolidation in the days to come, or could a news item—positive or negative—test one of these levels? Data source: S&P Dow Jones Indices.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

New Home Sales Slump: Government data this week showed new home sales sliding more than 15% in March to a seasonally adjusted yearly rate of 627,000. That was a pretty big drop, but it’s arguable that there could be more declines to come. While video tours of houses can be pretty cool, a house is generally something that people want to walk through in person. The report follows data on existing home sales from earlier in the week, which also fell more than expected. Of the latest numbers, Briefing.com noted that “... COVID-19 shutdown issues didn't ramp up until the latter half of the month, which is a harbinger presumably of decidedly weaker activity in April.”

Worst May Be Behind the Housing Market: But not all the news in the housing market is doom and gloom. After falling dramatically as sellers and buyers retreated from the housing market, new listings began to trend upward over the weekend of April 18–19, according to research from Zillow. And while pending sales are also down significantly on a yearly basis, they may be turning a corner, Zillow said. While it’s too early to tell if the bounce in pending sales is the start of a recovery in home sales, “it shows that the deterioration is no longer getting worse—at least for now,” according to the Zillow report. Still “the possibility of a double-dip or W-shaped recovery, in which the situation improves for a time before worsening again, cannot be entirely dismissed at this point.”

On the Mortgage Front: This week, the latest mortgage applications index from the Mortgage Bankers Association (MBA) showed a 0.3% seasonally adjusted weekly drop in overall mortgage applications. But within the data there were also some promising signs. Home purchase applications rose 2%, helped by increases in Washington and California. And although the refinance index dropped slightly for the week, it was close to its 2013 highs and was 225% higher than the same week a year ago, leaving the refinance share of mortgage activity at 75.4% of total applications. “Borrowers continue to take advantage of low rates to gain some monthly savings, which is a welcome reprieve during these tough economic times,” Joel Kan, the MBA’s associate vice president of economic and industry forecasting, said in a statement accompanying the numbers. That means people could end up having more money each month to spend on other things that might help stimulate the economy.