People Sold in May

By Matthew Klein |  Friday, May 1

May Day. The major stock indexes all fell sharply Friday, with the S&P 500 shedding 2.8%. It was the index's worst start to the month of May since 1928, according to Callie Cox of Ally Bank. Each of the 11 sectors in the S&P were down, with consumer staples faring the best. Bond yields, gold, and the dollar were basically flat, while oil prices edged up.

Just one of 30 components in the Dow Jones Industrial Average rose on the day: Walmart.

Friday's dismal performance came after a stellar run. As Nicholas Jasinski noted in yesterday’s newsletter, the S&P 500 had its biggest one-month gain in April since January 1987. A wave of optimism buoyed stock prices in the face of collapsing earnings and warning signals from the bond and commodity markets. Then people were reminded of the facts.

New manufacturing surveys released by IHS Markit and the Institute for Supply Management made for grim reading Friday, with new orders, output, and employment all worse than during the trough of the global financial crisis. Perhaps most alarming was the news out of China, published Thursday night, which showed the manufacturing sector struggling despite much of the country seemingly having returned to normal. Turns out that a worldwide collapse in consumer spending will do that, even if employees are able to “go back to work.”

Meanwhile, existing U.S. programs to prevent small business failures are proving increasingly insufficient. The “paycheck protection program” has been plagued with issues, largely because there wasn’t enough money allocated to the program in the first place, leading to a scramble to fill out loan applications and many businesses missing out entirely. (The time-limited nature of the program will soon become an issue, but that’s not until June.)

Now an investigation from the Wall Street Journal highlights another PPP problem: the requirement that 75% of the funds must go to payroll for loans to be forgiven, with no more than 25% going to “rent, mortgage interest, and utility payments.” That’s untenable for many businesses such as restaurants, barbershops, nail salons, and small stores operating in high-rent cities. The 25% cap wasn’t part of the original law, but rather a regulation written by the Treasury Department and the Small Business Administration after PPP was passed.