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As each month comes to an end, we always take a moment to reflect on what has happened and where the markets are headed. And this month, we have a lot to reflect on. Yesterday, April 29th, the US market rallied to a seven week high on a fury of good news, strong earnings from Alphabet (Googles Parent company), hopes for a corona virus treatment, opening of several states and positive news on the ability for the Federal Reserve to keep spending.
Like the old saying goes, April was a surly cat and threw the market some good punches; record setting negative oil, slowed consumer spending, record high government spending and soaring unemployment. But the market was prepared, blocked April’s moves and kept driving forward bolstered by indications of possible treatments and the gradual reopening of the world’s major economies. The S&P500 has regained 30% since the March 23rd lows, with half those gains being posted in April. April 2020 is on track to become the best month for stocks since 1974 according to data from Howard Silverblatt, from S&P Dow Jones Indices.
As we enter earning season, we will begin to see a much clearer picture of how the coronavirus crisis has affected businesses. So far major companies like Facebook, Microsoft, Amazon and Alphabet have all reported that they saw strong growth in sales and profit for the 1st quarter while Yum Brands, who owns KFC, Pizza Hut and Taco Bell are reporting mix results. Their Pizza Hut and KFC locations have seen reduced sales while Taco Bell has seen an increase.
Back home, in Canada, the first quarter included railway blockades, a teacher strike in Ontario, and finally, travel bans causing the steep declines in air and accommodations services. Then April came and we saw record low oil prices. But then suddenly, the good news started to come in. Much like the US, the Canadian government dedicated billions of dollars in stimulus money combined with the periodic glimmer of positive news; like Saskatchewan reopening for business, fueled investors optimism and that the glut of oil, perhaps, isn’t as bad as we thought.
The direction of the stock market is a combination of hard data and investor psychology. The price of a stock is based on how much investors think a company can make in the future. The market cares about the facts reflected today and more about how those facts affect the coming year. So when the news reports that March GDP fell 4.8%, that information was already built into the market and the investors are looking beyond that for the recovery to start. Instead, market participants have latched on to the idea that the worst-case scenarios have been mitigated.
As we head into May, I believe that Aprils positive trend will continue. May will become a month of optimism as we begin to reopen the world, after successfully slowing the spread of COVID. Now is a time to re-evaluate your holdings and position yourself for a post-covid reality. Being an investor means worry more about the quality of the stocks over when the perfect day to buy them is. Do not miss out on opportunities by trying to outsmart the market.
For the past six weeks, it seems like we are continually making history, and to be honest, I am ready for a bit of normalcy. Unfortunately, today was anything but normal, as the price of WTI broke all the previous records and traded below zero for the first time.
Today was unprecedented; the price for the May contract is breaking every price low since 1946, and at one point hitting -$40.32 a barrel. The extreme price lows show just how oversupplied the US oil market has become as COVID-19 shuts down industrial and economic activities reducing demand. And while it was hoped that the deal from OPEC last week curbing supplies would help, it was too little too late.
So here we are today, facing a technical oddity, caused by traders flee the May Future contract ahead of its expiration tomorrow. US storage room is non-existent, and while production cuts are being announced daily, it hasn’t happened quickly enough to avoid maximum storage levels. The result is producers having to pay buyers to take the crude that they can not store.
What does this mean for Western Canadian select? Usually, WCS, which generally trades at a discount to WTI due to transportation, but today it is trading above WTI, as WCS was trading against the June contracts, not the May contracts. WCS is still not selling at a price that is supportive of production costs, closing at $9.02USD.
I always like to include little positive thoughts to my writings, and I would like to note that we do expect as production is reduced and eventually, the easing of travel restrictions, we will see a rising demand for oil. While it is unlikely that we will see prices that we expected heading into 2020; hopefully, negative oil prices will be a once in a lifetime event.
Closing Prices April 20th, 2020
WTI May contract -$37.63.
WTI June Contract $21.04
WCS $9.02 USD