Cracks are emerging. Recent rally since its March lows may be a result of a handful of technology-related stocks – Microsoft, Amazon, Apple and Alphabet, which accounting for nearly 18% of S&P weighting. Hence, this week’s corporate earnings are vital first reality check as it will set market tone for next couple of weeks as well. First on the call list is Alphabet on 28th April, Microsoft on 29th April and both Apple and Amazon on 30th April respectively. Attention should be given to their market guidance as global equity markets have been trading sideways since 9th April.

With 9% of S&P 500 firms having already reported 1Q earnings including all of the major banks, results so far, have generally disappointed relative to already tepid expectations. About 43% of companies have missed consensus expectations, on pace for the highest rate since at least 1998 with earnings set to drop by 15% but it's 2Q2020 that the real pain will be with Goldman Sach now expecting S&P 500 to plunge by a record 123%. In the own words of Nomura, momentum suffers a "spectacular crash" once current liquidity-driven rally fades. JP Morgan is not too far behind, expecting now a 35% decline in shareholder pay-out, just shy of the 50% recorded during the 2008/09 Global Financial Crisis (GFC), which could prove too be quite optimistic, in my view.

If earnings estimate being adjusted downward, it means today’s market valuation is just as expensive than it was in the middle of February. As we stand now, earnings estimate has been declining at an accelerating pace. Even with the reopening of US economy, possibly as early as June, “new normal” would probably take another 6-9 months after that. In the case of China, we still observe sharp decline in travel within major economic hubs and between cities. Data from China’s Ministry of Transport indicate that the seven-day average of overall passenger trips made nationwide on railways, roads, waterways and on civilian flights was 19.8 million on 17th April compared to an average 47.4 million over the same corresponding period last year. In metro Guangzhou, the same average was 5 million, down from 9.3 million, and in Beijing the figure was 3.1 million, down from 9.4 million respectively.

The colossal collapse of oil prices could force complacency to be replaced by primal fear. Historical drop in the price of crude may have just begun in earnest as the price of Canadian oil just turned negative. It is my view that crude oil prices have collapsed to a level that will cause major economic dislocations around the world. More than 20 million US jobs have been lost in the last four weeks and unemployment could reach as high as 17%.

Hoarding will become next feature to note. If debt-bomb isn’t bad enough, I start to read reports among that consumers are now paying their rent by credit card. I remembered vividly that during the banking crisis of 2008/09 GFC, how TARP money was being hoarded by the big banks, when the government was pushing for them to loan the money out to stimulate the economy. The key different this time around is, it is the consumer, not banks. Massive corporate buyback programs, which were the proverbial floor underneath the 11-year bull stock market, is not happening this time around.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com