Crude oil crashed, yet stocks held in there last week. In fact, it was one of the best one-month rallies ever, which could actually mean market strength may continue. Also, we are in the heart of earnings season, and so far, it is off to a rough start.
What happened to oil
Lower oil prices help the consumer, but it hurts the energy companies. As the LPL strategists discuss, this is a unique situation and one we probably didn’t expect to see in our lifetime. Negative crude oil prices resulted from limited demand and a function of the way futures contracts work, coupled with no one wanting to hold physical oil because of limited places to store it.
Best 20-day rally
The LPL strategists noted the rally off the March 23 lows is historic, up more than 22% in 20 days, for the second-best one-month return since WWII. When we look at other times stocks were up big over a one-month period, we find the future returns were quite strong. In fact, a year after the one-month rallies, the S&P 500 Index was higher 10 out of 10 times. As the LPL strategists discuss, near term a pullback is perfectly warranted, but when looking at the bigger picture, this could be a bullish sign for stocks.
Earnings season update
Second quarter earnings are now expected to be down close to 30% from positive estimates just a few months ago. As the LPL strategists discuss, first quarter earnings could be down by mid-teen percentages, and earnings may likely go into a trough in Q2 before beginning to improve the second half of this year. Estimates for the next four quarters have been cut by 13% in April. The big improvement in earnings most likely will be in 2021 as the economy gets back online.
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