For a day at least, reality set into equities, as early gains on the major indices were thwarted by waves of selling throughout the session.
The Dow Jones Industrial Average, which was higher by more than 140 points, peaked before 10:30 am and ended the day 101 points lower. Stuck at a very stubborn resistance level in the 24,300-24,650 range, this current attempt to break out is the fourth since the market collapse of March. Repeated efforts to surge through to new recent highs has met with considerable pressure on the sell side of the equation for the past two months and it appears that the rally has either lost all of its momentum or the investment community has become skeptical of the move higher so early in the cycle.
While the real economy has not even bottomed out yet, stocks seem to be of a mind of their own, pricing in every positive development but failing to realize the overall negative consequences from lockdowns and a dramatically reduced global economy.
More to the point, first quarter earnings for the bulk of companies on the exchanges have been recorded and they were, for the most part, uninspiring, with more than a handful of companies issuing cautious forward guidance and a slew of firms cutting dividends or eliminating them altogether. The recent gains have been fueled only by excessive amounts of Fed currency seeking a temporary place to park. Thus, share prices are unlikely to remain elevated for much longer.
More than 100 companies cut their dividend payout in the week ending April 16, and that number is on top of hundreds of other companies that have slashed and burned shareholders with dividend reductions or eliminations.
The folks at TradingStockAlerts.com keeps track of these important developments on a weekly basis and the numbers are scary for anyone investing in stocks for steady income.
What happens when second quarter GDP numbers arrive in July and show the economy slowing by 40% or further? Along with companies cutting their dividends, there's the likelihood of declines in the value of their shares as well, as profitability is eroded as markets shrink.
With Wall Street giddy with Fed fun money, it's something to thank about going forward.
Funny thing is, stocks are right about where they were just after the moonshot open Monday morning. They've managed to hold onto most of the gains from that huge gap up open, but have not moved forward since. How long stocks can maintain the facade of robustness when 20-25% of the working population is out of a job or thousands of companies are cutting dividends is unknown. What is known, however, is that financial fakery has been rewarded, but the probable end game is something completely different, with many more losers than winners.
Like it or not, the economic crisis is real and just getting started.
At the Close, Thursday, May 21, 2020:
Dow: 24,474.12, -101.78 (-0.41%)
NASDAQ: 9,284.88, -90.90 (-0.97%)
S&P 500: 2,948.51, -23.10 (-0.78%)
NYSE: 11,351.60, -68.44 (-0.60%)
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