Stocks could be stuck in a range until there’s more proof reopenings are reviving the economy

Coming off a volatile week, analysts expect stocks to continue navigating choppy trading as investors try to build a view of what the economy will look like once states reopen.

Recent data on April employment and consumer spending show the worst declines in post-World War II America. More data in the coming week may reveal how the housing market fared in April, after the economy abruptly fell off a cliff when states shut down their economies in the second half of March.

Investors’ focus will also be on the government stimulus programs to help the economy and markets get through the coronavirus crisis. Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin appear before the Senate Banking Committee Tuesday, as it reviews the government’s trillions in spending to help the economy, businesses and individuals. An interview with Powell will also air on “60 Minutes” Sunday night.

Earnings season is winding down but there are a number of reports from major retailers, like Walmart and Target, which should show that the big box stores and discounters are making out better than other retailers as consumers halted many discretionary purchases and moved more shopping online.

The S&P 500 was down nearly 2.3%, in its worst week since March 20. The S&P ended at 2,863. The Dow was off about 2.6% for the week, in its worst week since April 3. It finished the week at 23,598. The Nasdaq also had its worst week since April 3.

“Housing is going to be important in that you’ll see the chilling effect that Covid has had on housing as well, less on construction than on sales, but on both,” said Diane Swonk, chef economist at Grant Thornton. “That’s going to be an issue. One of the key things we’re watching going forward is the credit market and housing. There’s been a real tightening of credit because of the servicers.”

Swonk said the mortgage servicers are caught in the middle between the banks and people who aren’t making their payments. She said it has been impacting lending. “That’s something we cannot afford. Housing was on a tear before, and it has to pull us out of this,” she said.

Retail sales were down 16.4% in April, and there was an unevenness of performance across the sector. The only positive category was online shopping, up 8.4%. Clothing and accessories, the types of things department stores sell, fell by 78.8% in April. Building materials and garden equipment were down just 3.5%, and that could help Home Depot and Lowe’s which report earnings on Tuesday and Wednesday, respectively.

“Market reactions to the data have been somewhat muted,” said Patrick Leary, chief market strategist at Incapital. He said stocks on Friday were reacting negatively to threats from China that U.S. companies could be targeted if the U.S. does not ease up on Huawei. “The markets right now don’t need another reason to be pessimistic. It seems like both the bond market and stock market are getting a little tired. Both markets are looking for the next catalyst.”

The Fed has been given generally high marks for keeping markets liquid, but analysts say they are now more worried about the solvency of companies.

“There’s an interesting kind of threshold here as we’re approaching three months stay at homes or shelter in place. We’re moving from a liquidity challenge, which the Fed helped us address, to a solvency challenge,” said Michael Arone, chief market strategist at State Street Global Advisors.  He said unpaid bills start to pile up and default rates rise on credit cards and mortgages.

“The longer this goes on, the harder for folks to make those payments. That’s why states are eager to open even if it has some risks,” Arone said. 

The Fed on Friday said the pandemic poses severe risks to businesses of all sizes and millions of households. It said there could be a sharp rise in defaults as households struggle to pay bills.

Julian Emanuel, chief equity and derivatives strategist at BTIG, said the Federal Reserve has removed worries about liquidity with its facilities and asset purchases. “The reality is the solvency issue which is the bigger focus of the economy and they go hand in hand with the employment issues as things that have to be addressed at some point,” he said. “Look out over the next two months, the solvency issues are based on how the economy reopens and how that medical progress looks.”

Emanuel said the Fed’s corporate bond program has helped companies refinance and clean up their balance sheet so if insolvencies become a big problem it would not be until next year. He said how the economy reopens over the next few months will determine what happens.

“The numbers are out in front of us. We do believe based on what we’re seeing so far, this is the trough of every reading we’re seeing. We do believe things are going to get better. We don’t have reason to believe that’s not the case,” he said.

Emanuel said the reopenings would be graded as a ‘B’ of ‘B+’ based on how they appear to be going so far, including the infection rates. Nearly all states have resumed some level of activity.

But the market will continue to be choppy until there is more medical progress, such as a vaccine. In a sense, the market depends on science more than ever,  Emanuel said.

“If all of a sudden, we have a commercially viable vaccine in  the first half of next year that’s going to be injected into peoples’ arms prior to, or well before the fall of 2021, then I do think you could make the argument the market is potentially going to hit new all time highs,”  Emanuel said.

For now though, he sees the market as range bound, and the S&P 500 is currently about in the middle of it.

“We have been very adamant about the definition of this market as being neither bull nor bear. It’s bounded by the 200-day moving average on the top, which is basically 3,000 and the 200-week moving average on the bottom which is 2,667 right now,” said Emanuel.

Arone agrees stocks are going to be choppy, and could react to friction. He said one source of friction is the disagreement over state reopenings, between people who want to see a reopening and those that fear a new outbreak. He said there is also friction between Republicans and Democrats.

“I think until we get clarity that the economy is open and without incident and some of these economic numbers are improving, I think the market is going to remain choppy,” he said.

Emanuel said it makes sense for the market to remain in a sideways range while different issues are resolved. 

“On a valuation basis, the market is expensive but it’s not so expensive if you assume this economic period is going to be over in a couple of quarters,” Emanuel said. “If you return to growth in the third and fourth quarter which we don’t necessarily know if that’s going to be robust, but we expect it to be better next year.”

He said he expects a recovery to be more shaped like a bathtub, than like a V or a U, meaning it would be elongated on the bottom before an upturn. 

“Part of what actually supports the market is this abject negativity. When everyone is already pessimistic the presumption is they’ve already done a lot of their selling so there isn’t a ton of fuel for the downside there,” said Emanuel.

Monday

Earnings: Softbank, International Game Tech, Trivago, Baidu

8:30 a.m. Business leaders survey

10:00 a.m. NAHB

Tuesday

Earnings: Walmart, Home Depot, Advance Auto Parts, Kohl’s, Eagle Materials, Urban Outfitters

8:30 a.m. Housing starts

10:00 a.m. Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin before Senate Banking

2:00 p.m. Boston Fed President Eric Rosengren

Wednesday

Earnings: Target, Lowe’s, McKesson, LBrands, Expedia, Take-Two Interactive, Shoe Carnival, Analog Devices

Thursday

Earnings: Best Buy, BJ’s Wholesale, Hormel, TJX, Medtronic, Hewlett Packard Enterprise, Agilent, Deckers Outdoor, Splunk, Intuit, Deckers Outdoor, Ross Stores, Plantronics

8:30 a.m. Initial jobless claims

8:30 a.m. Philadelphia Fed manufacturing survey

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Existing home sales

10:00 a.m. New York Fed President John Williams

2:30 p.m. Fed Chairman Jerome Powell and Fed Governor Lael Brainard

Friday

Earnings: Alibaba, Buckle, Burberry, Deere, Foot Locker