How Likely Would a Second Coronavirus Wave Negatively Impact the Stock Market?

Second Coronavirus Wave Negatively Impact the Stock MarketAs Johns Hopkins University of Medicine’s Coronavirus Resource Center revealed a recent increase of coronavirus cases in the Southern and Southwestern United States, the VIX ticked up. With fears of the outbreak curve not flattening, how will this impact markets?

The Volatility Index (VIX) was established by the Chicago Board Options Exchange in 1993 to gauge volatility in the financial markets. Referred to colloquially as the “fear index”, it measures the next 30 days of anticipated volatility for the U.S. Stock Market via S&P 500 options. For reference, during the peak of the 2008 financial crisis, it topped out at 89.53. During periods of relative calm, it’s not unheard of to trade below 10. On March 16 of this year, the VIX reached 82, thus demonstrating how volatile investors expected markets to be due to the uncertainty of the coronavirus.

On February 12, 2020, the Dow reached 29,551.42 and the S&P 500 rose to 3,379.45. But by the end of February, these major indices experienced their greatest fall since 2008, ushering in a market correction.

Coronavirus and its Impact on the Markets

Starting in early March, the COVID-19 pandemic began taking a negative toll on stock markets worldwide, the worst since 2008. On March 9, the Dow fell 2,158 points, or 8.2 percent, during the day’s lows. Other major U.S. markets were not spared – the S&P 500 fell 7.6 percent and the Nasdaq dropped 7.3 percent.

On March 12, the U.S. stock indices dropped more. The S&P 500 fell another 9.5 percent, along with the Dow falling 2,353 points, almost 10 percent lower. For the Dow, it was the worse one-day performance since Oct. 19, 1987’s drop, bringing it back to 2017 levels. While there was hope of a sustained rally beginning on March 13, it was dashed when the Dow Jones fell nearly 13 percent or 2,997.10 points, and the S&P 500 dropped nearly 12 percent on March 16.

Factors Contributing to the Crash

While the stock market crash in 2020 was directly attributable to the coronavirus outbreak worldwide, many experts, including the International Monetary Fund (IMF), view the coronavirus as speeding up a global slowdown that was already in the works.

Despite the St. Louis Fed’s data that showed the United States had an unemployment rate of 3.6 percent in late 2019, the nation’s industrial output peaked in 2017, and experts noticed a declining trend at the start of 2018. The IMF also believed the United States-China trade war made global growth more challenging going forward.

There were other concerning factors about economic growth domestically and internationally, causing fear a worldwide recession was beginning. March 2019 saw the U.S. yield curve inverting – which means longer-term debts yield less than shorter-term debts. The ISM Manufacturing Index fell below 50 percent in August 2019, dropping to 48.3 percent in October 2019, and remaining below 50 percent through 2019.

When it comes to rising COVID-19 cases, the state of California saw 4,515 new cases over 24 hours, as reported on June 21. Florida’s reports on June 20 and 21 saw the number of cases increase by 4,049 and 3,494, respectively. Other Southern and Western states, such as Nevada, Missouri, and Utah, reported one-day records in increases of coronavirus cases as well.

With Georgia, Alabama, Florida, and California, among others, showing concerning trends for increased coronavirus infection rates, analysts at Deutsche Bank expressed concern about how the virus may keep spreading. According to the same research, there’s some trepidation on how it may negatively impact economic growth. Depending on the overall hospital capacity to handle a resurgence in severe COVID-19 cases, how well the medical infrastructure responds will influence how the economy functions going forward.

With the number of increasing cases shifting from the Northeast to Southern and Western states, it’s feared that there will be another panic on Wall Street as reopening the economy is postponed, further stunting economic activity.

Research from Jefferies Financial Group found that even though coronavirus cases are increasing, it’s not the only or the biggest worry. Jefferies’ research found that for investors, the biggest concern is how well and how fast the economy bounces back.

Analysts believe that there needs to be more than just action by The Federal Reserve to inspire market confidence. The research found four main concerns, which included the effects of COVID-19:

  • 6.6 percent of respondents said the upcoming election is the most important factor
  • 12.1 percent of respondents said a second wave of COVID-19 is the most important factor
  • 31.1 percent of respondents said The Federal Reserve’s decision is the most important factor
  • 50.2 percent of respondents said the shape of the recovery is the most important factor

As the economy reopens and medical experts become more knowledgeable and better prepared to deal with COVID-19 through therapies and equipment for hospitalizations, it seems that investors will be taking a more holistic investing approach.

Are Dividends Becoming a Luxury During the Coronavirus Pandemic?

smAccording to the futures market, Chicago Mercantile Exchange contracts are forecasting a drop of 27 percent in dividends over 24 months for the S&P 500 index. Dividends are projected to fall to $42.05 in 2021, a drop from 2020’s dividend of $47.55 and 2019’s high of $58.24. Looking forward to 2026, according to CME’s futures contract, the dividend is expected to recover to $56.65. While the latter years are not as likely as what’s up next, it’s worth taking note.

Although these dividend levels have already been announced, the future doesn’t look much brighter. According to Goldman Sachs, Q2 economic growth is expected to drop by 34 percent. Even though the COVID-19 economic crisis is expected to be worse, we can get an idea of how bad by comparing it to the financial crisis of 2008. From 2007 to 2009, the S&P 500 dividend dropped by 25 percent; it took 48 months to recover from this drop. Based on this historical look-back, chances are it’ll take longer to get back to par this time around.

It’s noteworthy to highlight companies that suspended their dividends in April 2020, and when they last suspended their dividends, historically speaking. Dine Brands Global (DIN) initially paused its stock-buyback program. This was followed up with a suspension of its quarterly dividend of 76 cents. Royal Dutch Shell lowered its dividend by two-thirds to 16 cents per share, the first time since 1945. These examples illustrate just how dire the economic situation is for companies around the world.    

Cash Dividends Explained

A cash dividend is money distributed to stockholders according to a corporation’s present earnings or amassed profits. Dividends are declared and issued by a board of directors that determines whether they’ll remain the same, increase or decrease. 

Understanding the Need to Reduce or Cut Dividends

A dividend cut often results in a drop in a company’s stock price since it indicates a weakened financial position. Oftentimes, dividends are cut because earnings are dropping or there’s less money available to pay the dividend, which can be due to increasing debt levels.

The point here is that dividend cuts are a poor sign for a company that is facing financial difficulties due to reduced revenue, with the same overhead still needed to be paid (rent, wages, insurance, debt servicing). While dividends can be cut for short- or long-term reasons, such as buying their own stock back or buying out another company, with the ongoing coronavirus situation the majority of businesses aren’t doing it for positive reasons.

While reducing or removing a dividend from a company’s stock can divert cash for ongoing operations or debt servicing, it also can tell the markets things aren’t going well financially. This is illustrated by looking at AT&T. In December 2000, the company reduced its dividends by 83 percent, lowering it to 3.75 cents, versus the expected 22 cents by shareholders.

One of the first signals that a company can’t pay dividends, or won’t be able to in the near future, is to look at the company’s earnings trend and its payout ratio.

Looking at a Historical Example

During the second half of the 1990s, AT&T’s stock faced more and more competitors as deregulation went into effect. According to the company’s income statements from 1998 to 2000, annual earnings per share dropped by 50 percent.  

This data is according to AT&T’s 10-K, which shows that its yearly earnings dropped from $1.96 in 1998; to $1.74 in 1999; and finally to $0.88 in 2000. With this precipitous decline in earnings and the financial pressure it put on AT&T, a reduction in dividends came next. Based on this data and some analysis, we can explain how the Dividend Payout Ratio works.

Understanding the Dividend Payout Ratio

Using this ratio can help investors gauge how likely a company’s dividend will be cut or removed altogether.

Dividend Payout Ratio = Dividend Payment per Share / Earnings per Share

Looking at AT&T’s 10-Q report for Q3 of 2000, AT&T earned 35 cents per share and gave shareholders a dividend of 22 cents a share. Based on the dividend payout ratio formula, the resulting ratio was 0.63. This ratio means that 63 percent of AT&T’s earnings were given to shareholders via dividends. When companies have challenging earnings seasons, the payout ratio gets closer to 1 because whatever the company earns is eaten up by the dividend. Therefore, the closer the ratio gets to 1, the more likely the dividend will be lowered or suspended.

While there’s no predicting what the economy will do in the future, looking at past trends can give investors insight into what companies will do with their dividends when the economy faces new headwinds.

How Will U.S. Employment Figures, Coronavirus Impact Job Markets?

How Will U.S. Employment Figures, Coronavirus Impact Job Markets?With the CARES Act (Coronavirus Aid, Relief and Economic Security) signed into law by President Trump on March 27, this set into motion major initiatives by the U.S. government in response to the coronavirus’ economic impact. This Act provides $2 trillion in financial aid to the nation, in big part to soften the impact of the coronavirus’ hit to the country’s unemployment numbers.

For the week ending April 11, seasonally adjusted jobless claims came in at 5,245,000, a drop of 1,370,000 from the April 9 revised level of 6,615,000, according to an April 16 news release from the U.S. Department of Labor.

For the week ending April 18, seasonally adjusted initial claims were reported at 4,427,000, or 810,000 fewer than the prior week’s revised level, according to an April 23 news release from the U.S. Department of Labor. April 11’s adjusted level was lowered by 8,000 to 5,237,000, down from the original 5,245,000 figure.

Taking into account the cumulative unemployment claims over the past five weeks, there have been approximately 26 million workers in the United States put out of work due to the coronavirus and the resulting economic downturn. With the employment picture facing a grim reality, the CARES Act provides many relief programs.

One part of the law provides financial relief for individuals, families, and businesses. Highlights include direct payments of $1,200 for individuals making up to $75,000, $112,000 for heads of households, and $150,000 for joint filers. Enhanced unemployment benefits also are included in the law to help those who are laid off, including contract workers.

Another way the CARES Act helps stimulate the economy is through the Paycheck Protection Program. Funded at $349 billion, this SBA-backed loan is designed to offer financial help to struggling businesses impacted by the coronavirus. A key aspect of this program is to give businesses enough money to pay at least eight weeks of payroll and related expenses to increase their chances of staying in business.

Factors for eligibility to apply for PPP loans include companies that are able to demonstrate their business has been reduced by Covid-19 and have less than 500 workers on their PPP application. Examples of eligible businesses/individuals include independently-owned franchises, contractors/self-employed individuals, tribal businesses, hotels, and restaurants. Eligible companies are able to have their loans forgiven, up to $10 million if they are borrowed from an SBA-approved 7(a) lender.  

According to the U.S. Department of the Treasury, loans may be forgivable if the following criteria are met. No less than 75 percent of the loan is to be used for payroll costs, at which payroll costs on a 12-month basis are maxed out at $100k. Other allowable loan funds, up to 25 percent of the loan proceeds, can be used to pay for rent, utilities or mortgage interest. However, if full-time staffing is reduced or if the salary is reduced by more than 25 percent for full-time employees making less than $100k per 2019’s salary, PPP borrowers may owe money back. However, if any disqualifying changes that occurred between Feb. 15 and April 16 are made whole by June 30, the loans can become re-eligible to be forgiven.

Economic Injury Disaster Loan

Another significant relief program the CARES Act provides in the way of economic relief is through the Economic Injury Disaster Loans program (EIDL). The EIDL program is generally for businesses with 500 or fewer employees, whereby the company can apply to borrow as much as $200k. Loans up to $25,000 require no collateral, and requests above $25,000 require only business assets to serve as collateral.

One significant provision of the EIDL is what’s referred to as the Economic Injury Disaster Loan Emergency Advance. This enables applicants of the EIDL to receive as much as $10,000 in relief that’s not required to be paid back, creating a de facto grant, per the U.S. Small Business Administration. Businesses can receive as much as $1,000 per employee, up to $10,000, based on the number of workers a business employs. Depending on how extensive a business has suffered economically, a maximum of $2 million can be borrowed by a business through EIDLs and/or physical disaster loans, according to the U.S. Small Business Administration.

With these and other domestic government stimulus programs, coupled with other countries implementing their own stimulus programs, it’s worth noting different potential outcomes depending on the pandemic’s severity and health mitigation factors. According to the Organization for Economic Cooperation and Development, the following are some forecasts on how Covid-19 is likely to impact the global economy:

  • While the coronavirus data from China has been questioned, the OECD says that assuming the infections from the coronavirus peak during Q1 in China, the world’s economy is expected to grow less than projected for 2020, dropping to 2.4 percent from 2.9 percent. And while China’s economy is expected to drop below 5 percent in 2020, the country is expected to exceed 6 percent growth in 2021.
  • The OECD also noted that with a pandemic lingering longer and with greater intensity throughout the Asia-Pacific region, North America and Europe, it projects worldwide growth to drop to 1.5 percent in 2020.

Only time will determine how much of an impact the coronavirus will have on global markets. Governments around the world will continue to do their part to mitigate negative impacts.

Coronavirus: Black Swan or Buying Opportunity?

Coronavirus Stock Market, Covid19 Stock MarketAccording to the World Economic Forum (WEF), the spread of the coronavirus will impact the world’s economy. Whether it’s a Reuter’s poll from economic experts projecting growth in China slowing to 4.5 percent in Q1 of 2020, in contrast to China’s Q4 GDP of 6 percent; or the International Energy Agency (IEA) saying world desire for oil will be lower due to the coronavirus; or global companies reducing or temporarily closing their Chinese factories, change is on its way. Based on this data, what does the global economic outlook entail?

In order to understand how the coronavirus might impact global economies, it’s important to put this in context of other global events. Based on a February 2020 Monetary Policy Report from The Federal Reserve, there’s a mixed outlook for recent and projected economic activity. While the Fed notes that oil prices have increased over the past six months of 2019, in part due to OPEC members cutting production and brief tensions with Iran in January 2020, The Fed attributes more recent drops in oil prices to the coronavirus and associated lowered global demand.

Due to China’s already slowing economy, the IEA is projecting 435,000 fewer barrels of oil on an annual basis during Q1 of 2020, the worst in a decade. Looking at statistics from the United Nation’s International Civil Aviation Organization (ICAO), airlines are expected to see revenue losses of between $4 billion and $5 billion in the first three months of 2020. With the coronavirus impacting China, thereby reducing outbound travel to Japan and Thailand, losses could be as big as $1.29 billion and $1.15 billion for each respective country.  

The Fed explains that in 2019, manufacturing has been challenged both globally and domestically. Citing the industrial production (IP) index, the first six months of 2019 saw declines in both domestic and global activity. For 2019, U.S. production dropped by 1.3 percent for durable and non-durable goods. This is attributed to trade issues with China, soft economic growth worldwide, less than aggressive investment from businesses, declining oil prices that lower continued production by crude producers and production issues with Boeing’s 737 Max airplanes.

However, despite the manufacturing slowdown in China, the United States’ manufacturing base shouldn’t see the same impact from the coronavirus. The Fed says that factoring in purchasing materials for production on the input end, and transporting, wholesaling and retailing products post-production, the drop of 1.3 percent on the industrial production index equates to a 0.5 percent drop in U.S. GDP. For context, compared to the U.S. manufacturing employing 30 percent of workers 70 years ago, it presently employs 9 percent of workers.     

One way to see how the coronavirus might play out is to look at how SARS impacted China in 2003. Based on data from the National Bureau of Statistics in China, it took three months, during Q1 of 2003, where China’s economic growth dropped to 9.1 percent, from 11.1 percent. While a much smaller economy, on a global scale, in future quarters China was able to grow at an annualized rate of 10 percent, per Refinitiv. However, economists note that if SARS didn’t impact China, there could have been another 0.5 percent to 1 percent increase in annual growth.   

Another comparison with SARS is China’s retail sales. Refinitiv shows that May 2003 retail sales dropped to 4.3 percent. This is compared to between 8 percent and 10 percent for retail sales figures in March 2003 and July 2003, showing how serious the impact SARS made, but also China’s resiliency.

While the Chinese economy impacts the global economy today more than when SARS hit, it also has a more responsive economy and a larger middle class. Only time will tell as to the coronavirus’ impact, but based on past experience, it should only be a matter of time before China’s (and the global) economy bounces back to greater economic output. 

How Will Oil Prices Fare in 2020 With Global Events?

How Will Oil Prices Fare in 2020 With Global Events?When it comes to 2020 and energy prices, the world’s energy market will face many known and unknown variables. How and what types of events that will ultimately play out are unknown but, according to industry and government experts, there are some variables that are projected to lead to lower global prices overall.

Based on a Dec. 10 short-term energy outlook publication from the U.S. Energy Information Administration (EIA), there will be a mix of pushes and pulls on the price of crude oil and associated refining products. Market prices in 2020 for Brent crude oil is expected to average around $61, compared to 2019’s $64 average price per barrel. Looking at West Texas Intermediate (WTI) quotes, the EIA sees this type of crude settling, on average, at about $5.50 per barrel lower than Brent crude oil in 2020. The EIA bases its lowered price forecast on greater supplies of oil globally, especially in the first half of 2020. 

The agency’s data shows that in September 2019, America exported more than 90,000 net barrels per day of products from and crude oil itself. This is coupled with domestic export projections of 570,000 net barrels per day in 2020, in contrast to average net imports of 490,000 barrels per day in 2019.

According to EIA’s projections, U.S. crude oil production will grow by 900,000 barrels per day in 2020, compared to 2019’s production, resulting in 13.2 million barrels of daily production in 2020. This growth is compared to 2019’s production gains of 1.3 million barrels per day, and 2018’s 1.6 million barrel per day growth. The decrease in production, attributed by the EIA, is due to increased rig efficiency and well level productivity, despite the number of rigs dropping.

The EIA believes that OPEC and its “+” oil producing states will go beyond announced oil production cuts on Dec. 6, further cutting production through March 2020. The original cuts of 1.2 million barrels per day, announced in December 2018, have been modified to reducing production to 1.7 million barrels per day. The EIA expects the major global producers to keep production curtailed through all of 2020, due to increasing global oil inventories.

Fuel Standard’s Impact on Oil Prices

Through implementation of the International Maritime Organization (IMO), Jan. 1, 2020, is ushering in new standards for allowable levels of sulfur in bunker fuel. This fuel will be required to contain no more than 0.5 percent sulfur content, compared to current allowable levels of 3.5 percent of the bunker oil’s weight. In reaction to the new standards, the EIA expects American refineries to increase operations by 3 percent in 2020 versus 2019’s production. It’s expected to increase wholesale margins in 2020 to 57 cents per gallon, on average, with it spiking to 61 cents per gallon. This is compared to 45 cents a gallon in 2019.

The Federal Reserve and Oil Prices

According to the Dec. 11, 2019, FOMC statement from The Federal Reserve, there was no modification to the federal funds rate. They based their decision on a yearly measure for inflation, excluding food and energy, along with signs of continued economic expansion, including healthy job creation and continued high rates of employment. However, the Fed indicated that if its goals of fostering a growing economy, maintaining a healthy job market and a 2 percent inflation target fall short, it will take appropriate action to keep supporting economic expansion. Depending on the Fed’s action to lower, increase or maintain its rates, the price of oil would feel the impacts.

While there’s no telling how fiscal policy and geopolitical events will play out in 2020, it looks like the price of oil will head south.

What Would a Phase One Deal with China Encompass?

What Would a Phase One Trade Deal with China Encompass?The so-called phase one of a trade deal with China is expected to contain a provision for $40 billion to $50 billion in purchases of American agricultural products by China, according to an October news release from U.S. Sen. John Hoeven (D-ND) With ongoing discussions surrounding the US-Sino trade talks, there are rumors for such a partial trade deal. But how has the recent past impacted both countries’ economies and a mutual desire for better trade deals?

While not directly related but announced during a similar time frame, a November press release from the United States Trade Representative (USTR) announced Chinese acknowledgment and acceptance of American poultry exports. This stated that China will now accept $1 billion in American poultry and related poultry products, effectively reversing China’s ban.

After a December 2014 avian influenza outbreak, China banned US poultry in January 2015. America exported more than half a billion dollars of poultry to China in 2013, and there has been much interest in restarting exports to China since August 2017. With the USTR citing U.S. poultry exports of $4.3 billion in 2018, this will undoubtedly ensure America maintains its position as the globe’s second biggest poultry exporter.

According to a late October press release from the USTR, there will be a 30-day comment period in November to garner public opinion on continuing tariff exemptions on certain Chinese goods, worth approximately $34 billion. The items currently exempt are set to reverse exclusion on Dec. 28. Additionally, as part of phase one discussions, the United States is expected to not implement tariffs scheduled to take effect on Dec. 15, along with rolling back existing tariffs in stages.

Trade War’s Impact

According to BNP Paribas Wealth Management, the trade impasse between the United States and China has had a measurable negative impact on the world’s economy. BNP cited a 1.2 percent point reduction in growth over the past 1.5 years.

However, the phase one deal is expected to include many provisions, such as $40 billion to $50 billion of US farm product exports to China, along with $16 billion to $20 billion of Boeing aircraft for commercial use to China.

Financial institutions outside of China will be able to establish insurance companies in mainland China, financed by ex-China investments, along with being able to hold shares in the newly created entities. Ex-China lending institutions will be able to create wholly owned banks and conduct business in the Yuan or Renminbi (RMB) currency throughout mainland China without explicit approval from Chinese officials.

These developments, according to the Chinese State Council and China Banking and Regulatory Commission and CNBC, are part of the ongoing discussions to determine how China will increase IP protection and the aforementioned agricultural purchases. Announced on Oct. 11, 2019, the China Securities Regulatory Commission will work on lifting limits on ownership ceilings for ex-China entities, specifically in mutual funds, securities and futures operating in China.

BNP also mentions expectations of Dec. 15, 2019, tariffs to not be implemented, along with expectations for existing tariffs to be relaxed or reduced. In addition to giving American farmers increased sales, this will provide China with more soybeans for domestic consumption, including an ability to help increase the number of the country’s pork livestock population through feedstock. If phase one is agreed to, it’s also expected to help the RMB appreciate. Based on recent data, the RMB has appreciated by three percent since September 2019.   

One noteworthy item that depends on a phase one deal being certified is the expectation that it will positively impact the global economy. The International Monetary Fund dropped its World Economic Outlook gross domestic product projection from 3.2 percent in July 2019, down to 3.0 percent, based on the current trade tensions.

Since there’s great hope for a phase one deal that will encourage mutual and global economic development, there’s confidence that both countries facing economic hardships will find a short-term resolution.