• Jeran Van Alfen, CFP®

Monday Market Review April 20, 2020


Economic news, per the new norm, reflected a slowing economy from Covid-related shutdowns. This included disappointing results in retail sales, regional manufacturing, housing, and employment.

Global equity markets were mixed on the week, displaying far less volatility than in recent weeks, as hopes rose for reopening of the global economy sooner than later. Government bonds gained slightly, as interest rates ticked downward, faring better than corporates. Commodities were mixed, with volatility in crude oil continuing due to falling global demand.

Market Notes

U.S. stocks experienced a positive week generally, as talk of ‘reopening’ economies accelerated, in keeping with possible peaks in Covid infection rates, as well as some success in treating the contagion with currently available antiviral therapeutics. Despite lengthening of lockdown deadlines in many global regions, this was taken as positive news, but is also likely to be a complex affair, with a struggle possible between the federal government and various states for control. There is also debate about which industries will be allowed to reopen first. The downside, of course, is that if this is done too early, and virus infection levels remain sufficiently high, there could be a second wave of cases and subsequent repeated lockdowns.

By sector, consumer discretionary and healthcare stocks led with gains well over 5%, while energy and financials suffered the most, due to lower oil prices again for the former, and the latter due to Q1 profits for several large banks falling sharply. Earnings results for Q1 are beginning to trickle in, with an expected year-over-year earnings decline coming in somewhere around -15%. The average peak-to-trough earnings decline during recessions is about twice this, at just under -30%. As revenues and profits are already expected to be terrible, corporate funding will continue to be watched closely, as a measure of how resilient some firms will be as the crisis continues. Selected reports for some public and private companies indicate stress and increasing probabilities of bankruptcy (the latter often mentioned by firms themselves in an effort to secure more financing) for consumer product and service firms.

Foreign markets also reacted positively to the news of possible economic reopenings. Japanese and emerging market equities outperformed, while Europe and the U.K. were little changed to lower for the week. Signs of economic recovery led stocks in China, South Korea, and Taiwan, which outperformed Russia and Brazil, tied to lower commodity prices. Chinese growth for Q1 declined -6.8%, the first such negative result in several decades, although reopening of business and consumer activity has fueled improved sentiment for coming months.

U.S. bonds gained slightly, as interest rates ticked downward again across the yield curve. Long-term treasuries gained the most ground, while high yield corporate debt fell back, experiencing losses. Emerging market debt was mixed, with USD bonds down and local bonds improving.

Commodities were mixed with higher prices for energy and industrial metals offset by declines in precious metals. The price of crude oil bounced around near $20/barrel for much of the week, due to a Saudi-led agreement to cut production. However, concerns over the continued glut of inventory and expected demand destruction from business shutdowns this quarter resulted in an unexpected drop this morning of over a third, pushing $10 levels. In fact, the recent drop has been so severe that one of the larger oil-tracking exchange-traded funds will be moving away from a front month-only futures contract format. This has been caused by some degree by investors seeking an oil price rebound, triggering position limits.

Economic Notes

(-) Retail sales for March were poor, as expected, falling -8.7%—slightly below the -8.0% forecast. This was led by sharp double-digit declines in autos and gas station sales. By contrast, removing these components, core sales actually rose by 1.7%. It appeared that declines in clothing (-50%) and other segments down -25%, such as furniture, food service, and sporting goods, were offset by gains in food and beverages overall—the impact of grocery stockpiling and takeout. This poor result was obviously expected, although it could actually be worse than reported, with some retailers closed and not responding to official surveys.

(-) The New York Empire manufacturing index fell by -56.7 points in April to a level of -78.2—the lowest reading in the 20-year history of the series, and far beyond the -35.0 level expected. As expected, underlying segments were also weak, including shipments, new orders, and employment. However, expectations for business conditions 6 months out rose by nearly 6 points to a 7.0 level. This extremely weak report reflects the status of NY as an epicenter of the Covid outbreak; the size and degree of shutdown has been more severe than in many other regions.

(-) The Philadelphia Fed manufacturing index fell by a similar -43.9 points to -56.6 in April, further than the -32.0 level expected. As expected, underlying components were also very weak, including shipments, new orders, and employment. However, expectations for the next 6 months improved by 8 points to a strong 43 level, a sign of optimism about future prospects.

(-) Industrial production for March fell by -5.4%, just beyond expectations calling for -4.0%. Production suffered due to a -30% drop in autos, although business equipment and utilities also declined (with office/industry not being offset by increased time at home). Capacity utilization fell by -4.3% to 72.7%, which is considered significant for a single month.

(0) Import prices for March fell by -2.3%, which was less dramatic than the -3.2% expected by consensus. The decline in petroleum prices represented the bulk of the decline, with those down -27% for the month, while prices without petroleum were only down a tenth of a percent for the month, which was led by a -10% drop in the prices for industrial supplies, while other categories changed to a far lesser degree. Year-over-year, import prices are down -4% on a headline level and -1% when removing petroleum. With lower economic activity, lower prices for goods, and lower inflation, tends to be a byproduct.

(-) The NAHB homebuilder index fell by a significant -42 points to 30, far below the 55 level expected. All three categories—current sales, future sales, and prospective buyer traffic—all fell by similar degrees, as did all four national regions. Unsurprisingly, with the majority of the U.S. under lockdown orders, plans for new homes and activity in general has come to a halt.

(-) Housing starts fell by -22.3% to a seasonally-adjusted annualized rate of 1.216 mil., below the expected decline of -18.7%. Multi-family starts fell by -32%, representing the bulk of volatility, while single-family also declined by -18%. All national regions suffered, with the West holding up best, and Northeast down over -40%. Building permits fell by -6.8%, which was less severe than the -10.7% expected. Here, multi-family starts rose by 5%, offset by a single-family decline of -12%. The Midwest experienced the largest regional declines, but all areas ended in the negative. To no surprise, construction activity has taken a hit due to broader economic shutdowns.

(-) The Conference Board Index of Leading Economic Indicators for March fell by -6.7%, which was noted as the largest decline in its 60-year history. Negativity was seen through all of the index’s inputs, mostly through initial jobless claims and stock prices. This brought the trailing 6-month growth rate to an annualized -12.8% decline, which was in sharp contrast to even the meager 0.2% annualized growth rate over the prior six months. The coincident economic indicator fell by -0.9% during the month, while the lagging indicator actually rose by 1.2%, with the ‘lagging’ component continuing to appear strong prior to Covid. As seen in the charts below, the decline in economic activity has been rapid and dramatic.

Source: The Conference Board. Shaded areas indicate recessions as defined by NBER.

(-) Initial jobless claims for the Apr. 11 ending week fell to 5.245 mil., an extremely large report, although a tempered pace from the prior week, and short of the 5.500 estimate. Continuing claims for the Apr. 4 week rose by 4.530 mil. to 11.976 mil., below the 13.260 mil. median forecast. This initial claims number pushed the one month loss to over 21 mil., as a significant fraction of the U.S. workforce has now been laid off, with an apparent continued backlog in processing of claims due to the unprecedented numbers. By far the worst claims experience in history for this short a timeframe, analysts will likely be looking at signs of improvement in continuing claims numbers to identify inflection points of possible improvement in coming weeks/months.

Have a good week.

Provided by:

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, ETF.com, 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.

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