Markets Teetering as Q1 Reports Come Out

A pedestrian walks by The Framing Gallery, closed due to the Covid-19 pandemic, in Grosse Pointe, Mich., last week. (AP Photo/Paul Sancya, File)

MANHATTAN (CN) — Markets opened to mild losses Monday as Wall Street tries to find any port in the economic storm.

The Dow Jones Industrial Average fell by 200 points at the morning bell, with the S&P 500 and Nasdaq having similar drops, as some experts say businesses and investors should prepare for a sustained economic downturn and not a quick recovery.

A working paper released Monday by the nonprofit National Bureau of Economic Research predicts a protracted “L-shaped” recovery, in which unemployment suddenly spikes and remains high for several months before approaching normal levels. A V-shaped recession, in which unemployment returns quickly to its baseline level, is unlikely, the researchers wrote.

The paper assumes a three-month lockdown and then 12 months of uncertainty regarding the pandemic.

“We find that, under reasonable parametrizations of the model, even a 3-month long lockdown is going to have long-lasting negative effects on unemployment,” they wrote, noting that their simulation “represents a lower bound on the effect of the pandemic on unemployment.”

However, they added that extending the lockdown from three months to six months would not significantly deepen unemployment rates four years out, as impending bankruptcies and “contractual frictions” will continue to hurt employment.

Wall Street recently shrugged off the weekly reports of historically bad unemployment, even though those reports do not likely include all the jobs lost during the Covid-19 pandemic.

Instead, many investors have remained focused on the mixed bag of company earnings for the first quarter of 2020.

In its quarterly earnings release, Marriott reported a huge drop in net income, from $375 million during the first quarter of 2019 to just $31 million in Q1 2020 — a drop of more than 90%.

The hotel company has raised more than $2 billion in liquidity to maintain cash flows through the next few months, and while it has withdrawn future guidance it said it is optimistic its balance sheets will improve later this year.

“The resilience of travel demand is evident in the improving trends we see in Greater China,” CEO Arne Sorenson said in a statement. “Occupancy at our hotels in the region reached 25% in April, up from less than 10% in mid-February 2020.”

Sorenson said lodging demands elsewhere in the world have stabilized at low levels, with occupancy in North American hotels at 20%.

In the health care realm, Cardinal Health posted an 18% year-over-year increase in net income, slightly above what many analysts expected.

In the first three months of 2020 — under the company’s fiscal calendar it just finished its third quarter — Cardinal made $350 million in net income, up from $296 million a year ago. It also reported an 11% jump in revenue between those periods, from $35.2 billion in Q3 2019 to $39.2 billion Q3 2020.

Overall, companies on the S&P 500 have taken an appreciable loss this quarter versus a year ago, but some sectors have beaten analyst expectations, according to a report by FactSet senior analyst John Butters.

Six sectors, led by the health care industry, posted year-over-year growth in revenue, while five other sectors — most notably energy, industrials and financial companies — posted drastic declines in year-over-year revenues, Butters found.

The consumer discretionary sector, which is comprised of durable goods, leisure items, and automobiles, showed the biggest drop in earnings, losing 50% year over year from the first quarter of 2019.

“Looking at future quarters, analysts predict a (year-over-year) decline in earnings in the second quarter (-40.6%), third quarter (-23.0%), and fourth quarter (-11.4%) of 2020,” Butters wrote, noting that analysts predict earnings to return to the black in Q1 2021 with a 12.2% increase.

Certain companies’ earnings report could enhance the economic picture.

Pharmaceutical company Mylan, which gained notoriety in 2016 for alleged price-gouging in EpiPens, was to release its quarterly financial results at 10:30 a.m. Monday EST.

Investors also are awaiting earnings by shopping mall operator Simon Property Group, which will release quarterly results after markets close Monday. As malls begin to reopen, investors are hoping a flood of shoppers helps to offset the lockdowns in March and April, though some experts say mall operators and real estate investment trusts that own malls will suffer greatly in coming months.

More than 4.1 million people worldwide have been confirmed as infected by Covid-19, according to Johns Hopkins University, and more than 284,000 have died. In the United States, more than 1.3 million people have contracted the novel coronavirus and at last count Sunday, 80,787 have died.

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