The Beige Book Looks at Tennessee

The Fed's periodic Beige Book, surveying economic conditions in various part of the country, came out this week. The Atlanta district covers the economy here in Tennessee, and here's some of what it said:

• Retailers and auto dealers reported very slow sales, and hospitality was at a record low.
• "As demand shifted from restaurants to grocers as a result of safer-at-home practices, some food service supply chains were left with excess inventories while others, such as meat processing and packing, experienced shortages. However, the majority of firms have not increased prices, either due to a lack of pricing power or as a show of goodwill to troubled consumers."
• "Continued declines in discretionary consumer spending was partially offset by sales growth in grocery and household products, office equipment, and home improvement goods. Ecommerce activity continued to accelerate as brick-and-mortar sales continued to decline."
• On the brighter side, financial institutions reported growth in commercial loans as businesses accessed lines of credit and the Paycheck Protection Program (PPP): "Many contacts reported success in securing a PPP loan, which allowed them to avoid layoffs."

Consumer Confidence Is Stabilizing

A little bit of good economic news came out yesterday. The Conference Board's widely followed consumer confidence index rose slightly in May, after rapid declines in both March and April.

The Conference Board survey’s present situation measure, based on consumers’ assessment of current business and labor market conditions, fell to a reading of 71.1 this month from 73.0 in April. But the expectations index based on consumers’ short-term outlook for income, business and labor market conditions climbed to 96.9 from a reading of 94.3 in April.

The percentage of consumers expecting an increase in income dropped to 14.0 percent this month from 17.2 percent in April. But the proportion anticipating a drop fell even further, from 18.4 percent to 15.0 percent.

Oil's Roaring Comeback

Back in April, the U.S. oil benchmark, West Texas Intermediate crude, plunged below zero and into negative territory for the first time on record. But May is shaping up to be WTI’s best month ever on a percentage basis, going back to its inception in 1983.

WTI has jumped more than 70 percent in May and posted four straight weeks of gains. Chinese demand for oil in April rebounded to 89 percent of what it was a year earlier, according to IHS Markit, and the firm expects May demand to be 92 percent of 2019′s level. China is the world's largest importer of oil.

Remember, though, part of WTI’s rally this month is due to the historic low from which it bounced. Prices are still about 50 percent below January’s high of $65.65.

Thoughts for Memorial Day

Without memory, there is no culture. Without memory, there would be no civilization, no society, no future. ~ Elie Wiesel

He loves his country best who strives to make it best. ~ Robert G. Ingersoll

It doesn’t take a hero to order men into battle. It takes a hero to be one of those men who goes into battle, ~ Norman Schwarzkopf

Coronavirus and the Housing Market

Wondering how the coronavirus is affecting the housing market? The news is not good. Sales of existing homes fell 17.8 percent in April, and were 17.2 percent lower than April 2019, according to the National Association of Realtors. The drop in closings is the largest one-month decline since July 2010.

That puts the annualized pace at 4.33 million units sold, the slowest sales rate since September 2011. The supply of homes for sale fell 19.7 percent annually to 1.47 million units for sale at the end of April. That is the lowest April inventory figure ever.

The drop in inventory pushed prices to a new high. The median price of an existing home sold in April rose 7.4 percent annually to $286,800. That record does not account for inflation, but in nominal terms, it's a record high.

Splurging on the Pandemic

How have you been dealing with the pandemic financially? Although many Americans are struggling, there have also been reports of many people splurging on expensive items, just for the comfort of it.

Despite the fact that consumer sentiment has taken a huge dive and more than 33 million Americans have filed for unemployment over the past month and a half, nearly one in five people say they are spending more money now than before the coronavirus outbreak hit. That's according to a recent survey conducted by Credit Karma, a personal-finance website.

Among the people who said they’re spending more, 1 in 10 said they have gone more than $1,000 over their budgets since sheltering in place. Some 35 percent of Americans say they have made impulse purchases to cope with the stress of the coronavirus pandemic.

Airlines and Hotels

U.S. stocks staged a strong, broad rally on Monday, with some of the most beaten-down industry groups staging a bit of a comeback. The S&P 500 airlines industry group surged 14.3 percent as data from the Transportation Security Administration showed air passenger traffic had risen for four straight weeks. United Airlines was up 21.1 percent, the biggest gainer in the entire S&P 500.

Riding on the coattails of the airlines was the S&P 500 hotels, resorts and cruise lines industry group, which leapt 13.4 percent on the day. Expedia was the S&P's second-biggest winner, climbing 18.6 percent.

But things aren't quite back to normal yet. The S&P 500 airlines as a group are still down 61 percent this year, while the hotels, resorts and cruise lines industry group is down 51 percent for 2020, according to FactSet.

What's Falling in Retail

Sales at U.S. retailers sank a record 16.4 percent in April after coronavirus lockdowns shuttered much of the economy, the federal government reported on Friday. Retail sales fell in every category except online shopping. Sales also sank by a revised 8.3 percent in March, marking the worst back-to-back declines in modern American history.

Apparel was hit the worst: Sales dropped a stunning 79 percent at clothing stores, falling from $22.1 billion in February to $2.4 billion in April. Grocery stores, which had benefited from consumer stockpiling in March, posted a 13 percent decline in sales.

Receipts fell by 60 percent at electronics stores, 59 percent at furniture stores, 30 percent at bars and restaurants and 15 percent at pharmacies. Sales at auto dealers fell more than 12 percent, and gas stations saw a 29 percent plunge in sales.

Glimmers in the Unemployment Numbers

Jobless claims were up by another 2.98 million last week, according to figures out yesterday. But there might be a a small sign of encouragement: The incremental increase of less than half a million was the most modest weekly change since early in March.

It's not just that continuing claims rose by 456,000, but the fact the increase was from a downwardly revised previous reading. The prior week’s count of new jobless was revised down to 22.38 million.

There are little reasons for optimism popping up all over the country. Sixteen states posted a decline in the number of people collecting benefits in the week ended May 2.

An Important IRS Deadline

If you haven't filed your taxes yet, today might be a good day to do it. The official IRS deadline has been extended to July 15, but today at noon is the deadline for Americans to submit their direct deposit information to get your stimulus check.

If you have not filed your taxes, you can still submit your bank-account or direct-deposit information to register for the payments. The link can be found at irs.gov here.

Without direct-deposit information on file, the IRS said it will continue mailing checks, but those checks mailed out after today’s deadline would arrive by late May at the earliest. The IRS has already transmitted economic impact payments to nearly 110 million accounts via direct deposit and mailed out nearly 20 million paper checks as of early May.

The Low Beat

Companies and analysts love to lower earnings expectations to make them more beatable; over the past five years, 73 percent of S&P 500 companies have beaten their estimates. Everyone knew first-quarter earnings would be bad this year because of the COVID-19 pandemic, but nevertheless, they’ve been beating forecasts by the lowest rate in at least 10 years.

According to J.P. Morgan, only about 65 percent of the companies that have already reported results are beating estimates. That would be the lowest beat ratio since the 2008 financial crisis.

In aggregate, earnings are missing consensus estimates by about 0.5 percent, according to Credit Suisse, That is primarily because of a 22.3 percent miss by the financial sector. Over the past five years, by contrast, the average aggregate earnings beat is 4.9 percent,

Nashville Reopens, Slowly

Today's the day that Nashville begins to reopen. It will be tentative at first, with restaurants, bars (serving food) and retailers all permitted to reopen at half capacity. There are several other restrictions as well, including:

• Wearing of cloth masks by employees and patrons
• Screening employees temperature daily
• Cleaning of carts and other items at places that have them
• "Explicit expectations" of frequent hand washing

Gyms, salons and barbershops still remain closed.

April's Jobs Report

The April jobs report is out this morning from the Labor Department, and it's as bad as people were expecting. Last month, 20.5 million American workers lost their jobs, sending the unemployment rate skyrocketing to 14.7 percent.

Both numbers easily smashed post-World War II era records. April’s unemployment rate topped the post-war record of 10.8 percent but was short of the Great Depression high estimated at 24.9 percent. The financial crisis peak was 10 percent, reached in October 2009.

The biggest hit was to the leisure and hospitality industry, which lost 7.7 million jobs, 5.5 million of whom came from eating and drinking establishments. Education and health services lost 2.5 million, while professional and business services as well as retail both saw 2.1 million workers lose their jobs. Manufacturing and “other services” dropped by 1.1 million apiece, and government fell by 980,000.

The Situation in Europe

As we're surveying the damage done to the U.S. by the COVID-19 pandemic, the situation in Europe looks just as bad if not worse. The European Commission released projections yesterday that Europe’s economy will shrink by 7.4 percent this year.

A top official told residents of the European Union, which dates back to the aftermath of the Second World War, to expect the “deepest economic recession in its history.” To put the new figure in perspective, in 2009, during the global financial crisis, the 27-nation bloc’s economy shrank by 4.5 percent.

Greece will be worst-hit in the union, according to the forecasts, losing 9.7 of its economic output this year. The economies of Italy and Spain will most likely shrink by over 9 percent each this year. Poland would suffer the least, with a 4.5 percent recession.

The Lofty Stock Market

One of the few bits of good financial news we've gotten in recent weeks has been the recovery of the stock market. Here's the downside of that: U.S. stocks are trading at pricier valuations relative to corporate profits than at any point since the dot-com bubble in 2000.

As S&P 500 index firms continue to report first-quarter earnings, managements have often declined to provide guidance on future performance, given the uncertainty the coronavirus pandemic has created. Such an environment has allowed the large-cap index to trade at more than 22 times expected 12-month earnings, a level not seen in roughly 20 years, according to FactSet.

RBC Capital Markets predicts 2021 earnings will ultimately come in at $153 per share for the S&P 500. At $153 per share, that would leave the S&P 500 trading at roughly 18.8 times 2021 earnings, well above the five-year average of 16.7 and the ten-year average of 15.

Disney's Woes

A sign of what the pandemic is doing to one of America's largest and best-known companies: Walt Disney Co. profit dropped more than 90 percent in the second quarter, the company reported this morning. Executives said that COVID-19 cost the media giant more than $1 billion in profit just in its theme-parks division.

Disney reported fiscal second-quarter profit of $460 million, or 26 cents a share on sales of $18.01 billion. In the same quarter a year ago, Disney had reported profits of more than $5 billion.

This is all despite the successful launch of Disney+, the streaming service that has gotten off to a stronger-than-expected start. Disney+ launched in November and had already passed 50 million paying subscribers by April.

Looking at a Double Dip

Since the market bottomed out on March 23, the S&P 500 and Dow Jones have surged 23 percent and 24 percent, respectively. But we may not be out of the woods yet. When the stock-market slips into a bear market, it tends to return to return to that low more often than not, according to data from Bespoke Investment Group.

Bespoke looked at the last 25 bear markets, dating back to 1928. In those instances, the S&P has dropped to a lower point than the initial low 60 percent of the time.

But the effect may be washing out. Of the 11 bear markets from 1928 through 1940, nine of them saw the S&P 500 make a lower low. Since 1940, more often than not, the bear markets have not set a new low after the initial drop.

April in the Rearview Mirror

After all the turmoil in the markets, April ended up being the best month for the major indexes in decades. The S&P 500 closed up 12.68 percent last month and the Dow closed up 11.08 percent. For both of them, it was their best month since January 1987. 

In addition, it was the best April for both indexes since 1938, according to Dow Jones Market Data. The Nasdaq Composite’s rise of 15.5 percent marked its best April ever.

That's the good news. The bad news is that the S&P 500 is down 9.85 percent this year, while the Dow is down 14.69 percent this year. Both indexes are on pace for their worst year since 1978.