Monday Market Review April 13, 2020
Economic data included tempered produce and consumer inflation figures, and sharply negative results, as expected, for jobless claims, job openings, and consumer sentiment. Impact from coronavirus-related economic shutdowns have begun to filter into official economic data, which is likely to continue in coming months.
On a shortened Good Friday week, global equity markets gained sharply as hopes for a flattening of new coronavirus infections boosted investor sentiment. Bonds were mixed, as interest rates ticked higher—helping corporate credit—while governments sold off. Commodities were mixed, with energy markets softer, while metals gained ground.
U.S. stocks continued to rebound last week (started off with a 7% gain Monday), realizing its strongest single week in decades. This was due to a deceleration in the new number of coronavirus cases appeared in key infection areas, including New York and parts of Europe. This naturally spurred optimism about a potential end to lockdowns. While it’s perhaps too early to call a peak, markets have been looking for any indication of some improvement and light at the end of the tunnel. By sector, cyclical materials and financials experienced the strongest gains, as did real estate, while more defensive consumer staples and health care earned far smaller gains.
Foreign stocks increased by a similar level, with developed markets falling a few percentage points short of domestic stocks, and emerging markets just below that. The French economy suffered an estimated -6% decline in Q1, with Germany close to -10%, while discussions were already underway in some European nations about re-opening non-essential businesses. There are also negotiations about a broader European rescue package, with hopes for Euro-issued ‘corona bonds’—however, debate exists about who would ultimately be on the hook for payment, similar to prior attempts to issue continent-wide debt. Emerging markets have lagged, due to still-present uncertainty about their ability to react to the spread of Covid beyond key developed markets on the medical or economic side. Additionally, volatility in commodities markets remains a key structural driver in these nations, which explains some relief in Brazil last week.
U.S. bonds were mixed, as treasuries lost ground along with investors again seeking risk, pushing interest rates higher, while both investment-grade and high yield corporates gained several percent as spreads continued to contract along with broader improvement in risk-taking. Foreign sovereign bonds were flattish, while emerging market debt improved along with general risk taking, which caused spreads to tighten.
Commodities were mixed for the week, as energy fell back again, while industrial and precious metals both gained. The price of crude oil bounced around in the mid-20’s during the week before setting at just under $23/barrel. Interventions by the U.S. led to agreements for OPEC+ production cuts, although there was pushback by Mexico in implementing the changes, and they’ve largely been seen as too little, too late to offset the sharp demand slowdown. This reflects the complexity of OPEC, in that each member has a different ‘breakeven’ oil price needed to meet government fiscal budget requirements, as well as game theory competition between members. This has been occurring for decades, and will continue to. In one sense, recent actions by the Saudis are the ironic reversal of the supply embargo of the early 1970s, where oil was withheld by the market. No doubt, the extreme push in supply would have been unthinkable at that time.
(0) The producer price index for March fell by -0.2%, half the degree of the expected -0.4% decline. On a core basis, removing food and energy prices, the index rose 0.2%, which surpassed expectations of no change. Energy prices fell by -7%, in keeping with crude oil supply overload, while food prices were little changed. Medical care services prices rose by 0.2%, also as expected considering higher usage. PPI is up 0.7% on a headline level, and 1.4% core on a year-over-year basis, which are naturally well below trend inflation rates.
(0) The March consumer price index fell by -0.4% on a headline level and -0.1% for core. Headline inflation was sharply affected by a drop in energy prices during the month, while core prices were held back by the shutdown in economic activity—this specifically affected results for airfares, hotels and clothing, where transactions have slowed to a trickle. Real estate/shelter inflation remained firmer, as did medical services. Year-over-year, headline and core CPI measures are higher by 1.5% and 2.1%, respectively.
(-) The preliminary April Univ. of Michigan index of consumer sentiment fell by a record -18.1 points, the largest decline in history, to a level of 71.0—just below the 75.0 expected. Assessments of current conditions fell by a staggering -31 points, while future expectations fell by a far less dramatic -10 points. Inflation expectations for the coming year fell by a tenth of a percent to 2.1%, while those for the next 5-10 years rose by two-tenths to 2.5%.
(-) The JOLTS measure of job openings in February fell by -130k to 6.882 mil., below the 6.500 mil. expected by consensus. The hiring rate and quits rates were flat at 3.9% and 2.3%, respectively. The job openings rate fell a tenth to 4.3%, while the layoff rate rose a tenth to 1.2%. These figures, being pre-coronavirus, still appear strong, but the data is generally stale at this point.
(-) Initial jobless claims for the Apr. 4 ending week fell by -261k to a still-extreme level of 6.606 mil., and above the 5.500 mil. expected. Continuing claims for the Mar. 28 week rose by 4.396 mil. to 7.455 mil., but short of the 8.236 mil. consensus forecast. Processing delays may explain some of this differential. Claims increases of this magnitude were generally expected, although precision is difficult at these high levels. As initial claims roll off and become ‘continuing’ as benefits rolls expand, this segment should swell in coming weeks and months. The timeframe is open-ended due to the lower thresholds for qualification, higher payouts, and longer duration of benefits. Interestingly, we’ve already seen anecdotal instances of companies unable to find enough workers to staff current positions, as generous unemployment benefit levels surpass actual wages in some cases.
(0) The March FOMC minutes from the emergency meeting mid-month showed widespread support by the committee for economic credit support, for both households and businesses. Additionally, there seemed to be consensus agreement that interest rates should stay at the lower bound (again) for the foreseeable future, due to the extreme level of expected economic deterioration from the virus. More directly tied to the Fed’s mandate, lower inflation levels were also expected, which adds more official fuel to the fire if the Fed needed rationale to keep policy accommodative to the extreme.
The Fed minutes note that participants were keen on stressing that government bond purchases were ensure liquidity as opposed to further easing. But, similar to the first round of quantitative easing after the financial crisis, and during yield curve control measures undertaken in the 1940s, the Fed is also again using open-market operations to control the shape of the yield curve. In addition to the short-term fed funds rate managed by policy, managing longer-term rates through purchases of treasuries (and agency MBS) allows an implied ‘cap’ of business and consumer borrowing costs. Low interest rates for fixed income overall tend to push investors toward riskier assets (stocks, real estate, etc.), which helps via household wealth effects.
As an aside, the Fed laid out details about several new lending programs previously announced for businesses and governments, under the CARES legislation. These included over $450 bil. approved for these purposes, including the primary/secondary credit facilities discussed in prior weeks, with the added breadth of securities that include high yield ETFs (an interesting change). The Fed also included more color on the municipal lending facility (up to $500 bil.), to assist issuers with market access and liquidity, as well as the Main Street Lending Program (up to $600 bil.), for smaller businesses. These programs are intended as ‘bridge loans’ during the Covid period, rather than full assistance, which could be addressed in future Congressional fiscal actions.
Question of the Week
Is the bear market over?
It’s possible, but it’s probably wise to not count on it. We’ve seen a remarkably quick and dramatic plunge and subsequent recovery in recent weeks. This consisted of the S&P 500 falling -34% from its peak on Feb. 19, to a low point on Mar. 23, before recovering by 25% since—for a net decline of ‘only’ -18%.
Over the years, it’s been rare for bouts of market volatility to be quick and simple affairs. While drawdowns can occur quickly, and can be followed by rebounds, it’s also possible for underlying pessimism to rear its head again as challenging conditions persist, and see an initial (or even lower) bottom revisited. The average -20% or more bear market since the 1920s took 8 months to occur, with 3.5 years needed to return to prior highs.
The bear markets of the early 1960s, early 1980s, and early 2000s all featured ‘double-bottoms,’ so to speak. This is more of a technical analysis term, referring to technical support levels where investors have apparently found a point of maximum pessimism and capitulation, which is often tested several times before improvement. With the coronavirus appearing relatively quickly onto the global scene, with few historical pandemic precedents, news flow is fluid and the negative impact on the economy could be with us for several quarters. Policymakers have already begun discussing ‘re-opening’ parts of or entire economies, which has inspired market sentiment as it would contain the amount of overall damage to economic growth. But, if it is not done carefully, continued virus flare-ups in select regions could be disruptive for months to come as longer-term efforts for therapeutics and a vaccine come together.
It’s important to not become complacent, and reassess that one’s current positioning is appropriate no matter the weeks and months ahead. This is important for potential volatility on the downside, if conditions don’t improve as quickly as markets hope. As importantly, it could also help avoid missing critical upside, since news on the medical or economic front could potentially be received very positively by global financial markets.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.