Joblessness, Disease & Profit Loss Make for Terrible Investment Trifecta

Hit with a slew of dismal earnings reports, a sad benchmark in U.S. Covid-19 cases, and a rise in unemployment claims, Wall Street had a bad day on Thursday. 

Motorists take part in a caravan protest Wednesday in front of Senator John Kennedy’s office at the Hale Boggs Federal Building in New Orleans, asking for the extension of the $600 in unemployment benefits to people out of work because of the coronavirus. (Max Becherer/The Advocate via AP)

MANHATTAN (CN) — A hat trick of bad news hit Wall Street on Thursday in the form of unemployment claims, rapidly increasing cases of Covid-19 and poor corporate earnings.

And investors reacted by dumping stocks.

The Nasdaq had the worst outing of the three U.S. indices, posting a 2.3% loss as several key tech stocks plummeted. The Dow Jones Industrial Average lost 1.2%, or 333 points, while the S&P 500 fell 1.2%. 

Investors were hit early in the day with news that new unemployment claims were on the rise for the first time since mid-March, when lockdowns were first imposed. More than 1.4 million new claims were filed for the week ending July 18, a 100,000-claim increase from the prior week.

The number of claims under the federal government’s Pandemic Unemployment Assistance program also increased, from 955,000 to 975,000.

The uptick in unemployment shows just how fragile the U.S. economy is and how a quick, V-shaped recovery is almost an impossibility now.

“The foundations to this recovery are cracking under the weight of a mismanaged health crisis,” wrote Gregory Daco, chief U.S. economist at Oxford Economics in an investor’s note. “While the rebounds in retail sales, employment, and industrial production through June were alluring, policymakers should not fall under the spell of rear-view-mirror economics.”

Members of Congress currently are working on a fourth stimulus packagesans President Trump’s payroll tax — but negotiations have stalled over the extension of the $600 plus-up in weekly unemployment. Even if a package is passed, it may already be too late to prevent some Americans from missing payments. 

Unemployment has not affected all workers equally, nor all states. As in the Great Recession, women and Hispanics have been the most severely affected during this current downturn, International Monetary Fund economist Ippei Shibata observed.

Geographical differences have become clear, also. Researchers at the Federal Reserve Bank of St. Louis found that states like Michigan with middling populations are among the highest in terms of unemployment claims. On the other hand, comparatively high-population states like Ohio and North Carolina are filing fewer unemployment claims, the researchers found.

The unemployment report came on the same day as the United States hit 4 million confirmed cases of Covid-19. According to data compiled by Johns Hopkins University, more than 15.3 million people have been infected by Covid-19 worldwide, while 625,000 have died. Nearly 144,000 U.S. deaths have been attributed to the virus.

Wall Street was not helped by the day’s earnings reports, which featured some big names in the tech and airline industries.

Predictably, airlines shouldered some of the worst of last quarter. American Airlines reported about an 86% drop in operating revenues year over year, from nearly $12 billion in Q2 2019 to $1.6 billion last quarter. The company also posted a $2 billion net income loss, while its earnings plummeted nearly 530% from a year ago.

“This was one of the most challenging quarters in American’s history,” CEO Doug Parker said in a statement.

Southwest Airlines also reported a $1.1 billion loss in operating income and a $915 million loss in net income last quarter, almost entirely due to scant demand for flights. The company also expects the third quarter to be bad, though perhaps not as bad as the second quarter.

“We were encouraged by improvements in May and June leisure passenger traffic trends, compared with March and April,” said CEO Gary Kelly in a statement. “However, the improving trends in revenue and bookings have recently stalled in July with the rise in Covid-19 cases.”

About 17,000 employees of the airline reportedly have signed up for temporary furloughs and buyouts to avoid layoffs. Southwest and other airlines that tapped a $25 billion federal aid package cannot lay off employees until October. 

Virtually all airlines are suffering. On Tuesday, United Airlines noted it had its worst quarter in the company’s 94-year history, losing $1.6 billion and seeing operating revenues drop 87% during the second quarter of 2020 compared with Q2 2019.

Other industries also have shared in the carnage. In its earnings release, AT&T reported a drop in revenue, from $45 billion during Q2 2019 to $41 billion last quarter, and the company’s diluted earnings per share dropped to one-third of its value a year ago. All segments of the company have fared poorly during the Covid-19 crisis, from entertainment to phone services.

Despite a 34% year-over-year increase in daily users, Twitter also found itself in tougher times, posting a 19% drop in revenue year over year and a huge loss in operating income, from $76 million in operating income during Q2 2019 to a loss of $124 million last quarter.

But not all the earnings reports have been bad. Beating analyst expectations, Microsoft announced a 13% year-over-year increase in revenue, to $38 billion, though it posted a 15% decrease in net income. Much of the company’s successes have been in cloud services and its Office software, as well as LinkedIn revenue, which increased 10%.

“The last five months have made it clear that tech intensity is the key to business resilience,” Satya Nadella, the company’s CEO, said in a statement. “Organizations that build their own digital capability will recover faster and emerge from this crisis stronger.”

Despite Microsoft reporting better-than-expected financials, the company’s stock fell 4.3% on Thursday.

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