Economic Update 4-20-2020

• 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.

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.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  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. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT