Despite a shocking week in the oil market and horrendous economic data, equities held their ground. With oil prices briefly falling below 0, we might have expected chaos to follow in the stock market. Instead, markets showed impressive resiliency. The S&P 500 finished only slightly lower on the week and is still sitting roughly 27% above its March 23rd low. At these levels, we continue to expect that some consolidation is likely, but we also respect the strength most stocks are exhibiting in the face of remarkable adversity.
The U.S. economy largely remains shut-down and the economic impact was put on full display in the oil market. With air travel at a standstill, people staying home, and business idled, there are few buyers of oil and the market is running out of storage capacity. With these conditions, those holding oil contracts were actually willing to pay others to take physical delivery and find a place to store barrels of oil. A market like this has never happened before and is a sign of the strange economic times we are living in.
Stocks have largely shrugged off such abnormalities. Even energy companies haven't followed oil prices lower. It feels like a lot of the bad news is already being accounted for in current prices. The data is bad, everyone knows it is bad, and policymakers are taking action to fix it. For now, this has instilled a degree of confidence in the market.
Companies also continue to report earnings. The focus has been almost entirely on what they are expecting over the next few quarters. Some have lowered their guidance while others have pulled it entirely given the unprecedented uncertainty. Still, stocks prices generally aren't being punished and dividends appear to not be cut. In fact, over 100 S&P 500 companies have raised their dividend this quarter while only 27 have cut.
So why are stocks holding up so well? The simple reason is that there is plenty of access to cheap money. The Fed, the government, and banks have shown a willingness and ability to step in to help when necessary. With that, the market is confident that most companies will come through unscathed. We will continue to balance this notion with the technical and momentum signals we see.
Preston May, CBE®
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