Here we go again, leaving the safety and comfort of an earnings season. In this time of coronavirus, that means we’re back to ducking and diving through no-man’s land, as wild guesses, contrived visions and volatile emotions confront us.
Then, at the end of that two-month gauntlet, we face an endurance run through the second-quarter earnings minefield. As we will have heard through the two months, the underlying economic data are historically awful.
What about the re-openings going on? Unfortunately, they offer little benefit for those earnings reports since the quarter is already half over and the re-openings are being doled out. However, there are two positives that could result from the reporting, itself.
First, companies write off the kitchen sink. It happens when businesses sense improvement in poor times. They use the (hopefully, last) lousy quarter to maximize expenses. Doing so clears the books, thereby improving future reports and growth measures. As to investors, so long as the poorer results aren’t a result of real problems, they are happy to forgive and forget the outsized expenses, while looking ahead to happier times.
Second, companies start providing guidance again. Importantly, it doesn’t have to be precise. After a quarter of being mum, any management commentary about the future with even a broad-brush outlook will be well received.
Okay, perhaps that sounds like a two-month plan of “shut your eyes and plug your ears” will result in investment happiness. But, no – there are too many major uncertainties. Here are four that could well play a role.
Four potentially negative factors
First, some stocks look to be in an upward trend, supported by underlying foundations. However, as we saw three months ago, the flipside of “support” is “breakdown.” If some leading stocks and the stock market fall through their foundation bottoms, that could signal the rebound/retracement rise was over, leaving the indexes free to roam. Such a breakdown could reignite “trader-enhanced” selloffs.
Look at the Dow Jones Industrial Average. It has been unable to break through the triple barrier I described in “Stock Market Takes On Exciting Triple Upside Barrier.” So, is it building a foundation just below the remaining two barriers, or is it showing weakness prior to a reversal? Breaking down through the nearby 50-day moving average would make a nifty confirmation of such a move.
Second, the odds are poor that such a selloff would once again be met by the investor calmness Vanguard bragged about after last quarter’s 35% drop. Were investors really calm and cool after the four-week plummet? Perhaps, but another explanation is deer in the headlights. When the Dow is giving up 1,000+ points in a day, do people yell, “Sell!” or look away, muttering, “crazy”? However, now, after weeks of commentary and a good-sized retracement, the future remains up in the air. The stock market’s rise has been used as a confidence builder. A second drop would do just the opposite, only more so. This truism remains relevant: It is easier to frighten people than it is to reassure them. Therefore, a second selloff from this point could produce nervous, not calm, behavior.
Third, much faith is being put on the U.S. Government’s fiscal policy and the Federal Reserve’s monetary policy. However, neither can offset an economic downward spiral. Government spending cannot fill the productive void left by a broad GDP decline. Nor can the Fed’s shoveling money into the financial system create business. No company is going to borrow, even at a zero rate, in order to make a capital investment in a questionable line of business. And, in a serious recession, most all lines of business are unrewarding.
Fourth, and perhaps the most worrisome of all: The “survival” payments and loans were done to try to control the damage temporarily, not to provide “stimulus” for growth. Expectations were for them to have a life of one to two months. We’re nearing the “that’s all, folks” point. Without another batch of survival payments (and, currently, the Senate is unwilling to consider them), delayed, painful actions will begin to be taken, such as non-payments, closures, defaults, further/continued furloughs/layoffs and bankruptcies. At the same time, governments, institutions, organizations, businesses and consumers will begin taking more drastic steps to conserve cash and prevent dire consequences.
The bottom line
As I explained in “Watch Out – Stock Market Likely To Make An ‘Unexpected’ Move,” divining any outlook from what we know (and in which we have confidence) is impossible right now. The unknowns and uncertainties are huge in size and enormous in potential effects, thereby making stock market decision-making a game of chance.
Perhaps by the time of the second quarter earnings reports, some unknowns will be known and uncertainties will shift from major to limited. If so, we could expect a “great washout” as companies use the everybody-knows-it-will-be-horrible second quarter earnings to clear the decks of financial detritus for smooth sailing again.
Meanwhile, prepare to be tossed about, while keeping an eye on the calendar. The morning of July 14 will have JPMorgan Chase JPM CEO Jamie Dimon revealing, not just earnings, but also his promised answers and facts about all the questions and unknowns from the April 14 earnings call. It should be a huge step forward. Plus, there is that hoped for bonus: A future view and business outlook.
