Monday Market Review May 11, 2020
Economic data for the week remained poor from Covid effects, as expected, as ISM non-manufacturing and employment plummeted to lows not seen in years.
U.S. and some foreign markets rose as investors looked around the bend at planned reopenings and mixed news about U.S.-China trade. Bonds ticked lower as interest rates rose along the curve along with investors anticipating a bottom in economic conditions. Commodities rose along with expectations for normalizing global supply/demand conditions.
U.S. stocks rose as increasing regional plans to reopen various segments of the economy helped spur investor sentiment. The tech- and healthcare-heavy Nasdaq index moved back into positive territory for the year-to-date period, while ‘value’ stocks remain down closer to -20%. Trade issues between the U.S. and China also led to a backdrop of uncertainty as threats of terminating the agreement completely were tempered with news of resumed talks to discuss details. There has been continued hope over Covid therapeutic and vaccine progress, which has helped investors see a possible light at the end of the tunnel.
Every sector was positive, with energy and tech leading the way, as oil prices stabilized, while defensive consumer staples and utilities earned the most meager gains. Earnings are on track to be 10-15% lower than last year, with this pessimism and expected future recovery already ‘built in’ to valuations it appears. With over 85% of S&P companies reporting quarterly earnings thus far, two-thirds have still reported results above estimates, which is below the five-year average (per FactSet), which likely says something about both the rapid path of earnings destruction as well as the earnings estimate process. However, the potential for further economic surprises on the downside or other waves of virus spread certainly could put the recent stock market rally at risk.
In foreign markets, U.K. and Japanese stocks experienced gains, Europe ended flat, while emerging markets lost ground. Interestingly, a high court in Germany ruled that portions of the ECB bond-buying plan were unconstitutional, and ordered an assessment to ensure a balance of priorities other than simply economic effects. While reopening of the Chinese economy has improved prospects for growth in coming quarters, and provided somewhat of a hoped-for template for what other nations may experience upon reopening, conditions remained guarded. In other emerging nations, such as Brazil, continued high exposure to Covid, slow growth, and weak commodity prices, have added additional pressure to markets and currencies.
U.S. bonds lost ground as interest rates generally ticked higher last week, with stronger hopes for economic revival. This often leads to even slightly higher rates, as the probability of further easing and market forces taking over is greater. Oddly, governments outperformed investment-grade credit, while high yield and bank loans actually earned positive returns for the week.
A stronger dollar last week pushed negative returns for foreign developed market debt even more negative. Year-to-date, the dollar has risen by 4%, putting pressure on these bonds from the standpoint of U.S. investors. Emerging market bonds, however, earned positive returns as investors sought out risk generally.
Commodity indexes rose, with all segments showing positive returns upon hopes for (eventual) economic improvement and recent supply adjustments. Energy led the way with gains in the double-digits, with the price of WTI crude oil rising back to around $25/barrel with some shutdowns of U.S. drilling activity. Longer-dated futures contracts, about three years out, continue to price oil in the upper $30’s, with prices approaching $50 a few years beyond that. While this only reflects current sentiment, the implication is that current supply/demand disruptions are expected to be temporary.
(-) The ISM non-manufacturing index for April fell by -10.7 points to 41.8, which actually outperformed expectations calling a level of 38.0. As assumed, due to the extreme slowdown in service industries, the underlying components were also down big. Business activity, new orders, and employment all declined by near or more than -20 points. New export orders fell by slightly less, but ended in roughly the same contractionary level as other segments. Prices paid rose by 5 points to 55, which likely reflects supply chain concerns in certain products. Unlike recent recessions, where manufacturing has been hit far harder than non-manufacturing/services, the shutdown of restaurants and a variety of other businesses have equaled the playing field in this case.
(-) The trade balance for March saw an increase in the deficit to -$44.4 bil., from -$39.9 bil. the prior month—a shade wider than expected, as trade volumes on both sides of the ledger declined substantially. Exports fell by -10%, led by services down -15%, which fared worse than goods exports, falling -6%. Petroleum did not play as large of a role in last month’s export differential. Imports fell by -6%.
(-) Initial jobless claims for the May 2 ending week fell by -677k to 3.169 mil., but was still higher than the median forecast of an even 3.000 mil. These have continued to rise on the East Coast, while the South has seen a sharp decline, on the heels of conversations about reopening certain businesses. Continuing claims for the Apr. 25 week rose by another 4.636 mil. to a level of 22.647 mil., surpassing the 19.800 mil. expected, as high initial claims reports rolled into longer-term status. Continuing claims continue to affect upwards of 20% of the U.S. workforce.
(-) The ADP private employment report showed a record decline in April of -20.236 mil. jobs, which was similar to the -20.550 mil. expected. Amazingly, they noted that this result didn’t include the full impact of Covid-related job losses. Services jobs fell by over -16 mil., with leisure/hospitality accounting for nearly half. Goods-producing employment fell by just over -4 mil., with construction accounting for over half of that figure. With numbers this large, the fine details aren’t as critical, but this survey reflects other measures that point to a large fraction of the U.S. workforce being furloughed.
(-) The employment situation report for April was about as bad as expected, due the widespread Covid-related shutdowns. Nonfarm payrolls fell by a record -20.5 million, compared to the -22.0 mil. loss expected. Leisure and hospitality took the biggest hit, according to the BLS, but nearly every industry was negatively affected to some degree. Interestingly, -16 mil. of April job losses were classified as ‘temporary’, although the breakdown is not as important due to the status for many aligned with unemployment insurance rules. By contrast, the magnitude of the job losses have been unprecedented in modern times, nearly 3 times the decline in 1945 during the end of military operations in World War II.
The unemployment rate rose by over 10 percentage points to 14.7%, which was actually less than the 16.0% expected by consensus. U-6 underemployment rose by over 14% to 22.8%. Household employment was similar to nonfarm payrolls, down -22.4 mil. The labor force participation rate fell by -2.5% to 60.2%.
Average hourly earnings rose by 4.7% on a seasonally-adjusted basis, with the year-over-year rate rising nearly 5% to 7.9%. This should also be taken with a grain of salt, as it’s due to the composition of the work force furloughed, as well as the addition of some ‘hazard pay’ in some industries, which bumped the numbers up. Average weekly hours rose by a tenth to 34.2.
In a separate report, nonfarm productivity saw a decline of an annualized -2.5% in Q1, which was not quite as poor as the -5.5% expected. Productivity on a year-over-year basis declined by -1.5% to 0.3%. Unit labor costs rose an average annualized 4.8% in Q1, surpassing the 4.5% gain expected, while the year-over-year rate fell a few tenths to 1.5%. These figures are naturally skewed by the extreme dislocations on both the output side and labor input, so won’t look especially meaningful until conditions normalize.
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.