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Stone's Weekly Market Guide - Week of May 4, 2020

Chart of the Week: Unfortunately, due to the pandemic my long-standing annual pilgrimage to Omaha for the Berkshire Hathaway Annual Meeting on May 2, 2020 was cancelled. It was replaced with a Warren Buffett and Greg Abel question and answer livestream lasting almost five hours. In a rare occurrence, Buffett disclosed specifics about Berkshire’s equity activities in April. Berkshire bought only $426 million in stocks while selling $6.5 billion and making no stock repurchases, so net stock sales were over $6 billion. Buffett further disclosed that the sales were primarily the divestment of his entire airline positions in American Airlines (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV) and United Airlines (UAL). After long eschewing airlines, Buffett began buying airlines in 2016 and amassed about 10% ownership of each. According to Buffett, he invested between $7-$8 billion in the group and “didn’t get that much out” with Bloomberg estimating the value of the holdings at about $10 billion at the end of 2019 (See Chart). He stated that these were specific sales and not a market call and his view was that the airline business has “changed in a very major way” and the “future is much less clear to me.” Looking at these sales can also provide insights into the mind of one of the greatest investors of all time. Please click here for the complete report about the annual meeting.


Airlines Normalized to 100 since 12/31/2015

Week in Preview


· Geopolitical: Economic data has been dismal with much of the world on lockdown to fight the spread of the coronavirus, but now attention is turning to easing restrictions and restarting economies. This easing is accompanied by uncertainty about the speed of the economic recovery and a possible second wave for the virus, so economic data and medical information will continue to be monitored closely for clues as to the outlook.


· U.S.: Tracking the historically sharp rise in weekly unemployment claims since the lockdown began indicates that the April jobs report will make for gruesome reading. Estimates call for over 20 million jobs being lost in April which would take employment down to the 1999 level while the unemployment rate soars to over 15%. Fedspeak is back on the calendar with seven speeches following the Federal Reserve meeting last week. The familiar refrain of “doing whatever it takes” to support the economy is likely to be heard in the speeches.


· S&P 500 1Q Earnings Season: With 55% of companies reporting so far, 65% of companies have exceeded earnings estimates. The 1Q blended earning growth rate is at -13.7% year-over-year (Y/Y) which improved from the previous week primarily due to the energy, technology and healthcare sectors. With 1Q earnings generally heavily trimmed by COVID-19, more attention is paid to forward guidance with 2020 earnings declining further and now expected at -17.8% Y/Y. 2Q earnings will be even worse than 1Q with consensus estimates deteriorating last week at -36.7% Y/Y. Even judging future estimates is complicated with many companies removing earnings guidance due to the unknown depth and length of the shutdown related economic weakness. 145 S&P 500 companies expected to report including AIG, ITW, DIS, VMC, PYPL, LYFT, BMY, BKNG and UBER.

· Europe: Eurozone Sentix investor confidence for May improved slightly to a still weak -41.8. Euro-area finance ministers meet to discuss the European Commission’s proposed recovery fund. Eurozone 1Q GDP was horrible last week with the expectation of an even worse report for 2Q. The U.K is scheduled to review its lockdown measures this week and is likely to begin a phased opening of the economy soon. The Bank of England (BOE) is expected to leave the policy rate unchanged and continue with large asset purchase targets. The London Stock Exchange is closed in observance of the Early May Bank Holiday (VE Day) on Friday.


· Asia: April China Caixin PMI and trade data will be watched for indications of the future possible path for the U.S. and rest of the globe. China is closed through Tuesday and Japan is on holiday for the Golden Week through Wednesday. March household spending in Japan is expected to decline to -6.1% Y/Y.


Central Banks: In addition to the BOE, the central banks of Australia, Malaysia, Chile, Brazil, Norway, Serbia, the Czech Republic and Peru meet with Malaysia, Brazil and the Czech Republic expected to cut their policy rates.


Week in Review


· Stocks fell by -0.2% for the S&P 500 with six of eleven sectors higher. 1Q U.S. GDP fell by -4.8% quarter-over-quarter annualized with consumer spending declining sharply. Energy (2.9%), communication services (2.0%) and materials (1.9%) outperformed the S&P 500, while utilities (-4.3%), healthcare (-2.6%) and consumer staples (-2.0%) were the biggest laggards. WTI (16.8%) and Brent (23.3%) rebounded sharply with MLPs (4.5%) and the energy sector (2.9%) significant outperformers. Small cap stocks outperformed the S&P 500 with the Russell 2000 up 2.22% with small cap value stocks the primary driver of the strong showing. The 10-year and 30-year U.S. Treasury yield rose slightly to 0.612% and 1.25% respectively.


· High yield credit spreads narrowed reflecting increased risk appetite. AAA municipal bond yields as a percent of Treasuries increased slightly and municipal bonds underperformed as investors consider the negative revenue impacts of the economic lockdown on local governments. Allowing states to declare bankruptcy should remain an unlikely outcome with the heart of the issue really about the size and distribution of Federal government aid to the states.


· The U.S. dollar was weaker against both developed and emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in U.S. dollar terms (3.0%) and on a hedged-currency basis (1.8%). Emerging market stocks outperformed the S&P 500 with the non-hedged return of 4.3% for MSCI EM.


· The 10-2 yield curve widened to +42 basis points. Another curve measure of three-month yield six quarters forward minus the current three-month yield also narrowed and closed the week at +14 basis points. The yield curve has historically provided an accurate forecast of future recessions when the difference in these measures turns negative, also known as inversion. Yield curves are one of the major indicators that we monitor to judge recession risk, but these inversions typically happen more than a year in advance of an economic recession and external shocks like the current outbreak might not be accompanied by one. Stocks have historically had significant advances post-inversion.


The PDF version of Stone's Weekly Market Guide is linked here.

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