Published the evening of 4/16/20
With the futures ripping after hours tonight on news that Gilead’s drug Remdesivir has proven effective in treating hospitalized coronavirus cases in Chicago, let’s take a quick look at the VIX.
- Recall that our levels to watch are 42, 50 and 58. These are 3, 4 and 5 standard deviations from the long run mean and signal various stages of market “fear” about near term US equity price volatility.
- Today the VIX traded briefly above 42 but ended the session at 40.1. To us that signals options markets were not overly concerned about the S&P 500 starting to swoon once again.
- We would use the VIX as one near-term market tell about how sustainable any rally tomorrow/next week can really be. It will decline, of course, but by how much?
Bottom line: let’s see if the VIX can break 34 tomorrow – 2 standard deviations from the mean and solidly back in “everything should return to normal” territory. When we wrote that “S&P 3200” piece early this week in Markets it was really just a math exercise to show how it might happen. But if the Gilead news is real, it may be more of an actual roadmap than we thought possible.
Even with that bullish observation, we should spare a thought for the Financials sector, and especially European bank stocks:
- Earnings season has been especially unkind to US Financials. The large cap slice of this group is down 9.2% in the last week (looking at the XLF ETF), and small caps in the space (PSCF) are down 11.8%.
- There’s a good macro reason for that.
We’ve spent a lot of time recently talking about how COVID-19 has cranked up the pressure on small companies and their employees, real estate (by virtue of the retail sector and to a lesser degree commercial office space), and even smaller public companies.
The Financial sector has direct exposure to all those affected groups, and it didn’t help that new FASB rules forced banks to report life-of-loan loss reserves this quarter for the first time ever.
- But as bad as all that is, the problems are far worse for many European financial institutions. Whether you look at the EUFN ETF (European banks ETF) or the Euro STOXX Bank Index, the story is the same. Both trade well below their Financial Crisis lows. Both are either within sight of their March lows (EUFN) or already through them (Euro STOXX).
Bottom line: whatever market optimism pushes US and European stock prices higher on Friday and into next week, watch to see if Financials take part. If they do, it will be a strong sign that markets are really buying the notion that the Gilead drug is a game changer. Anything that gets the world back to normal and avoids lasting economic fallout from shutting down the global economy should help US and European banks. A lot.
Lastly, a bit of real-world data to review: used car prices, because these may be the most underappreciated driver of economic growth out there. The higher the transaction prices for used cars, the better trade-in values are. Higher trade-in values mean more new car sales at the margin. And it goes both ways: lower used car prices dampen new car sales.
We used the Manheim Used Vehicle Value Index as our guide, data gathered from hundreds of used car auctions around the country in virtual real time:
- The March readings were quite strong, up 4.4% from a year ago. Manheim attributed this to tax refund season in the US, which while not especially strong in terms of average refund size did clearly send consumers to used car lots. Dealers responded by bidding up auction prices to replenish their inventory.
- The problem just now is that most car auctions are not running, and inventory is building up as a result.
- You can read Manheim’s report on the data here: https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html
Bottom line: with higher than average inventory and potentially lower than average demand from a cautious dealer community, used car prices are clearly going to soften in the near term and hurt new vehicle demand. As tempting as it might be to buy auto stocks on hopes for a quick US economic recovery, our 30 years covering the group says to be cautious here.