The Best Two Weeks Since 1938

By Matthew Klein |  Friday, April 17

A Warning from China. The body count from the coronavirus continues to rise, but markets rallied sharply on the hope that things will soon return to normal. The Dow Jones Industrial Average gained 3% on Friday and is now more than 30% above the low hit on March 23. These have been the best two weeks for the Dow since the summer of 1938. Bond yields ticked slightly higher and gold edged lower, in a sign that investors are marginally more interested in betting on good times ahead than buying protection against disaster.

Possible explanations include, but are not limited to: a coronavirus treatment from Gilead Sciences seems to be having promising results in tests, according to a report from STAT News on Thursday; the Wall Street Journal reported a possible breakthrough in Congressional negotiations to boost spending for hospitals and refill the “paycheck protection program,” which ran out of money earlier in the week; and Texas laid out a plan to start reopening parts of its economy as soon as next week.

The biggest market moves today, however, were in oil. The price of West Texas Intermediate crude oil dropped 8% to $18.27 – its lowest level since January 18, 2002. WTI is down 70% year to date thanks to an unprecedented collapse in demand and producers’ inability to restrict supply. Yet the S&P 500 energy sector gained more than 10%, far more than any other sub-index of U.S. large caps, in response to announcements of upcoming production cuts.

Oil and gas companies dominated the day’s biggest winners, with HollyFrontier, Marathon Petroleum, Valero Energy, Hess, EOG Resources, and Devon Energy all in the top ten. Halliburton, ConocoPhillips, Apache, Concho Resources, and Diamondback Energy Services were also among the big winners, each up at least 12%.

It wasn’t all good news. Consider the latest batch of economic data out of China, where the novel coronavirus originated. After an intense lockdown to stop the spread of the disease in January and February, the Chinese government has since lifted many of the restrictions, which means its data released on Thursday night are helpful for anyone to trying to understand the impact of a shutdown, as well as what reopening could look like in other parts of the world.

The big headline was that China’s gross domestic product was 9.8% lower in the first three months of the year than it was at the end of 2019. That is equivalent to a 34% drop at an annual rate, which is how U.S. GDP data are normally reported. China’s first-quarter drop is therefore close to many private-sector forecasts for the U.S. in the second quarter.

A closer look under the hood, however, suggests the U.S. experience could be even worse. Aside from the fact that China ostensibly got its outbreak under control faster, the economies look different: China is more exposed to manufacturing than the U.S. economy, which is dominated by the consumer. And in China manufacturing has come back quicker than the consumer.  That could be a troubling sign for U.S. economic growth in the coming months.