Monday Market Review April 6, 2020
Economic data continued to reflect a slowdown in activity as the result of the coronavirus, although last month’s releases were mixed to some degree, based on when the results were measured. A toll can already be seen in ISM non-manufacturing and employment.
U.S. and foreign equity markets fell back on continued uncertainty over economic impact from the coronavirus, and anticipation of a difficult few weeks ahead. U.S. bonds gained, upon government purchase support and a general investor avoidance of risk. Commodities gained as crude oil bounced sharply upon rumors of an OPEC production cut being discussed.
U.S. stocks fell, as optimism from the prior week’s Congressional stimulus package faded a bit. This change in tone was based on reports of the administration’s worst-case estimates of up to a quarter-million coronavirus fatalities, due to ramped up infection numbers in the NY area and CA. Seeing the magnitude of the 6 mil.-plus jobless claims being realized also appeared to weigh on sentiment. Small caps sharply underperformed large-caps, due to these companies’ lower cash buffers in many cases, more limited product lines, and domestic focus.
By sector, energy led the way for the first time in many weeks, gaining 5% upon a reversal upward in crude oil prices, followed by positive returns from consumer staples and health care. Financials and utilities lagged by the greatest degree, with returns of below -6%. Real estate also fared poorly, as prospects for a variety of sectors, including office and retail, continue to look bleak.
Foreign stocks performed largely in line with U.S. equities, following medical conditions and expectations for a global recession. Other than Europe outperforming Japan, with news of some coronavirus case deceleration, results were mixed to lower. Emerging markets fared with lower degrees of decline with reports of Chinese activity picking up, and double-digit returns in Russia, due to the strength of energy’s bounceback.
U.S. bonds fared decently for the week, as confidence from the backstop of Fed purchase activity and further ‘risk-off’ sentiment buoyed bond markets generally. Long-term treasuries fared best, although corporates, and especially floating rate bank loans, fared best and investors appeared interested in potential valuation opportunities in lower-rated debt. Foreign bonds were down slightly in local terms, but ended up weaker due to a strong dollar in both developed and emerging markets.
Commodities recovered by several percent last week, due solely to a comeback in the energy sector, while all other segments lost ground. The price of West Texas crude oil rose from a trough of $20 back to above $28/barrel over the course of the week—a dramatic shift—as rumors of a Saudi-Russian production cut agreement began to swirl.
(0/+) The ISM Manufacturing Index for March fell by -1.0 to 49.1, slightly into contraction, which was far better than the expected larger decline to 44.5. Production, new orders, and employment all fell by several points, into deeper contraction. Prices paid fell even further to extremely low levels. Supplier deliveries, however, rose by nearly 8 points, due to supply slowdowns. To no surprise, respondents anecdotally noted that coronavirus significantly impacted their operations.
(+) The ISM Non-Manufacturing Index for March fell by -4.8 points to a still-expansionary 52.5 level, despite expectations for a far steeper drop to 43.0. The underlying composition, though was less favorable, with business activity, new orders, and employment falling by several points; the supplier deliveries index rose, in keeping with slower turnaround times. Here, too, coronavirus impacts have intensified both from an operations and financial standpoint—however, likely to a mixed degree relative to the manufacturing index due to the higher proportion of at-home work.
(-) The Case-Shiller home price index for January experienced a gain of 0.3%, which fell a tenth short of expectations. Prices continued to rise in all but two of the 20 cities included, led by Seattle, Las Vegas, and Phoenix, each of which rose by up to a percent; Chicago and New York experienced minor declines. The year-over-year figure jumped by three-tenths to 3.1%.
(+) Pending home sales for February rose by 2.4%, a deceleration from the prior month, but beating the median forecast calling for -1.8%. Regionally, the West and Midwest each rose by 5%, to lead the way, although all areas saw growth. This brought the year-over-year growth rate up to 12%, although the impact of coronavirus shutdowns in coming months is likely to put a significant damper on activity.
(0) The trade balance tightened by $5.4 bil. to -$39.9 bil., which was generally in line with the -$40.0 bil. forecast. Imports fell by -3%, as nonpetroleum import declines offset a 5% gain in petroleum imports. These surpassed the minimal decline in net exports, as services export declines were offset by a rise in goods exports.
(0) The Conference Board index of consumer confidence fell by -10.7 points in March to 120.0, holding up better than the expected drop to 110.0. Assessments of the present economic situation actually rose by nearly 3 points, while those for the future unsurprisingly fell by nearly -20 points. However, the labor differential, which measures the ease in finding employment, fell by only -2 points. Naturally, consumer confidence in this time of uncertainty was expected to deteriorate, and may continue to do so while a change in conditions remains unclear.
(0) The ADP private employment report for March showed a decline of -27k, which was a dramatic shift from the nearly-200k jobs added the prior month, but not as severe as the -150k drop expected. Services jobs fell by -18k, with trade/transports/utilities hardest hit, while goods-producing jobs fell by -9k. Most importantly, small business jobs were down by -90k, re-emphasizing the rationale behind government aid for this segment. ADP mentioned that these states didn’t reflect the full impact of coronavirus effects, which will likely bode poorly for April’s figures.
(-) Initial jobless claims for the Mar. 28 ending week continued to rise, by a record 3.341 mil. to a record 6.648 mil. (surpassing the lowish forecast of 3.763 mil.). Continuing claims for the Mar. 21 week rose by 1.245 mil. to 3.029 mil., which was actually far lower than the 4.941 mil. expected. These numbers are obviously the largest in history at this point, with the differential between ‘initial’ and ‘continuing’ largely a matter of layoff and filing timing, as well as a large number of filing delays, as states were nowhere near prepared for this quick uptick in activity.
(-) The employment situation report for March had expectedly deteriorated, as the layoffs from the coronavirus are beginning to officially reach government statistical counts. However, April will be far worse, with an even deeper shutdown of activity, which renders the March report fairly irrelvant. At this point in time, it’s a matter of which states/industries have furloughed, and in which week, as the usual marginal rates of change are obviously far less meaningful than they once were.
Nonfarm payrolls fell by -701k for the month, far worse than the mere -100k drop expected. The details reflected the broader shutdown activity, with leisure/hospitality jobs falling by -459k, by far the largest segment, with over 400k in food services and the balance in accommodations. Services overall fell by -635k, while government jobs grew slightly due to an addition of census workers, and goods production jobs fell by a far more tempered -20k, albeit this being a far smaller sector.
The unemployment rate rose by 0.9% to 4.4%, which was the largest one-month rise since 1975, and beating expectations calling for a less dramatic 3.8%. The U-6 underemployment rate rose by 1.7% to 8.7%, with a large increase in part-time employment (from full-time). In keeping with this, household employment fell by a dramatic -2.987 mil. (largest monthly decline in the history of the series). The number of outright unemployed individuals rose a staggering 1.4 mil. to 7.1 mil., with the labor force participation rate falling by -0.7% to 62.7%. This number was expected to increase substantially, it’s more a matter of how long it took to get there. Expectations are for well over 10% or even 20% at a possible peak, due to the shutdowns that are occurring.
Average weekly earnings rose by 0.4%, bringing the year-over-year figure to 3.1%. No doubt, this data is also stale. Average weekly hours fell by -0.2 to 34.2.
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.