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Market Update

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Posted: 4/1/2020 1:15 PM EDT

Stocks Extending Yesterday's Selloff

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U.S. stocks are solidly lower, continuing to pare a recent rebound off of March 23rd lows, as uncertainty has intensified surrounding the economic and social impact of the coronavirus pandemic. The U.S. is expected to enter a rough patch enroute to the eye of the storm, while tolls in Europe continue to ramp up. U.S. manufacturing output contracted, but at a smaller-than-expected pace to cap off a slew of reads from across the globe, which also showed that China surprisingly returned to expansion, but activity contracted in Europe and the U.K. In other economic news, ADP's private sector jobs report fell by a smaller amount than forecasted, construction spending unexpectedly dropped and mortgage applications rose as interest rates tumbled. Treasury yields are mostly lower, and crude oil prices are seeing renewed pressure, while the U.S. dollar and gold are higher. In equity news, Xerox scrapped its takeover attempt of HP, W.W. Grainger has elected to draw down $1.0 billion from its unsecured revolving credit facility, and first quarter auto sales are showing larger-than-expected drops. Europe finished with widespread losses.

At 12:54 p.m. ET, the Dow Jones Industrial Average is falling 4.0%, the S&P 500 Index is dropping 4.2% higher, and the Nasdaq Composite is declining 3.7%. WTI crude oil is dipping $0.29 to $20.19 per barrel, Brent crude oil is $1.56 lower at $24.78 per barrel, and wholesale gasoline is off $0.03 at $0.56 per gallon. The Bloomberg gold spot price is advancing $5.11 at $1,582.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is increasing 0.6% at 99.65.

U.S. stocks are beginning the second quarter under pressure after registering the worst first quarter on record and posting a quarterly drop only rivaled by periods in the Depression era in the 1930s and the Global Financial Crisis of 2008. The markets continue to be hampered by uncertainty regarding the depth and duration of the economic and social shocks associated with the unprecedented COVID-19 (coronavirus) pandemic, which has fostered a self-imposed shutdown of the global economy and embrace of social distancing in an attempt to mitigate the spread of the coronavirus. Stocks had seen a noticeable rebound over the past week as U.S. lawmakers have deployed a massive amount of fiscal stimulus measures, reciprocated by a drastic monetary policy response from the Federal Reserve, while developments out of the healthcare sector have delivered hopes of potential expedited detection and treatment of the virus. However, the U.S. is now the epicenter of the pandemic and has yet to reach the apex of the outbreak as new cases and death tolls continue to rise and President Donald Trump has warned that the next couple weeks will be painful and the markets are grappling with whether the recent rebound is a countertrend move, looking to see if the markets will breach the March 23rd low.

Amid this backdrop, the Schwab Center for Financial Research (SCFR) discusses in the article, How the U.S. Economic Stimulus Package May Affect Investors, with Schwab Chief Investment Strategist Liz Ann Sonders noting that fiscal stimulus at this stage is really a rescue or triage mission but it is unlikely to actually stimulate growth, at least until the country is no longer shut down. Liz Ann adds that rather, it is meant to cushion the economic blow from the virus-containment policies, though it was important for the federal government to act quickly and decisively. She points out that the huge spending package will help, but it's hard to gauge its ultimate effectiveness when the severity of COVID-19's economic impact remains to be seen as discussed in her latest article, Triage: Throwing Everything at the Virus.

Meanwhile, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his latest commentary, What Will The Recovery Look Like?, noting that this recession is the result of a shock, not the natural end result of a slow build-up of excesses. Jeff adds that this may mean the recession and bear market could be deeper, but also that the duration may be shorter. For timely news and analysis follow Schwab experts from the SCFR on Twitter at @SchwabResearch, and check out our Q&A With Schwab Experts on Recent Market Volatility.

In specific equity news, Xerox Holdings Corporation (XRX $18) announced that is has scrapped its takeover attempt of HP Inc. (HPQ $15), due to the current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19. Shares of both companies are lower.

W.W. Grainger Inc. (GWW $237) announced that the supplier of maintenance, repair and operating products has elected to draw down $1.0 billion from its unsecured revolving credit facility. GWW said the move was a "proactive measure" to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. Shares are lower.

General Motors Company (GM $19) reported a first quarter drop of 7.0% year-over-year (y/y) in auto sales, more than the Edmunds forecast calling for a 4.3% decline, while Fiat Chrysler Automobiles NV (FCAU $7) posted a 10.0% fall in sales, compared to the estimated 7.1% decrease. Ford Motor Company (F $5) has not reported its quarterly sales results yet, but is forecasted to announce a 14.1% drop.

Manufacturing output contracts at slower paces than expected, ADP job report tops forecasts

The March Institute for Supply Management (ISM) Manufacturing Index (chart) dipped to 49.1 from February's unrevised 50.1 level, above of the Bloomberg forecast of a drop to 44.5. The index fell into contraction territory (a reading below 50), as new orders dropped to 42.2 from 49.8, production fell to 47.7 from 50.3, and employment declined to 43.8 from 46.9. The ISM said comments from the survey were negative regarding the near-term outlook, with sentiment clearly impacted by the coronavirus pandemic and energy market volatility.

The final Markit U.S. Manufacturing PMI Index was revised lower to 48.5 for March, versus expectations to be adjusted to 48.0 from the preliminary estimate of 49.2, and below February's 50.7 level. A reading below 50 denotes contraction. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies.

The ADP Employment Change Report showed private sector payrolls fell by 27,000 jobs in March, better than the Bloomberg forecast of a 150,000 drop, while February's increase of 183,000 jobs was revised to a 179,000 rise. However, ADP noted that the March data did not reflect the full impact of the coronavirus pandemic. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader March nonfarm payroll report, expected to show jobs fell by 100,000 and private sector payrolls dropped by 123,000 (economic calendar). The unemployment rate is forecasted to rise to 3.8% from 3.5% and average hourly earnings are projected to rise 0.2% month-over-month (m/m), and remain 3.0% higher y/y. However, the recent surge in the more-timely weekly jobless claims data, and tomorrow's expected jump, is likely to put heavy upward pressure on the unemployment rate.

The MBA Mortgage Application Index rose by 15.3% last week, following the prior week's 29.4% plunge. The gain came as a 25.5% surge in the Refinance Index more than offset a 10.8% fall for the Purchase Index. The average 30-year mortgage rate tumbled 35 basis points (bps) to 3.47%.

Construction spending (chart) dropped 1.3% month-over-month (m/m) in February, versus projections of a 0.6% increase, and following January's upwardly-revised 2.8% increase. Residential spending declined 0.6% m/m and non-residential spending fell 1.8%.

Treasuries are rising with the markets grappling with the festering COVID-19 pandemic uncertainty and massive amounts of fiscal and monetary policy responses, including yesterday's new temporary repurchase agreement facility for foreign and international monetary authorities, known as the FIMA Repo Facility. The yield on the 2-year note is dipping 1 bp to 0.24%, the yield on the 10-year note is dropping 7 bps 0.61%, and the 30-year bond rate is falling 8 bps to 1.24%. Amid the unprecedented market action, Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article how to Make Sense of Recent Bond Market Turmoil, noting that for some investors, the best course of action may be to do nothing. She adds that if you have a diversified portfolio that is designed to last through market ups and downs, you may be best off waiting out the storm. However, Kathy provides some advice for those who are upset by the volatility, delivering some steps that would make sense.

Europe tumbles as pandemic impact intensifies

European equities were broadly lower, as the second quarter began with the financial sector continuing to see pressure. The toll of the coronavirus pandemic continues to intensify and weighed on the markets, with the U.S. heading into the eye of the storm, while cases and deaths continue to rise in Spain, France, Germany and the U.K. Italy remains in critical condition even as recent data has provided some encouragement regarding the potential slowing of the pace of the outbreak. The markets also digested a host of global manufacturing reports, with China reporting a second data point suggesting a surprising return to growth, but Eurozone, U.K. and U.S. output contracting in March. The euro and the British pound were lower versus the U.S. dollar, while bond yields in the region were mixed. Schwab's Jeffrey Kleintop notes in his commentary, Q&A on COVID-19: The Economy, Markets and What Investors Should Do, that rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the duration rather than the decline.

The U.K. FTSE 100 Index was down 3.8%, France's CAC-40 Index dropped 4.3%, Germany's DAX Index fell 3.9%, Spain's IBEX 35 Index and Italy's FTSE MIB Index decreased 3.0%, and Switzerland's Swiss Market Index declined 1.5%.

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