Economic Update 4-27-2020

• Economic data for the week continues to reflect the current extreme slowdown, increasingly, as the March and April numbers are calculated and released. Jobless claims continued to come in at all-time highs, durable goods orders fell, and housing has begun to be affected as well.
• Global equity markets fell back last week due to concerns over plummeting oil prices, continued uncertainty over Covid lockdown timelines, and possible profit-taking. Bonds were little changed. Commodities were strongly affected by a drop in crude oil prices below zero briefly, before recovering a bit.

U.S. stocks suffered early in the week with volatility surrounding crude oil prices, and the movement of spot prices into negative terms, although these recovered later in the week. This ended a 15% two-week return period, which was the best such stretch since the 1930s. A surprise factor early was the health and continuing absence of North Korean dictator Kim Jong Un, after a reported surgical procedure. In times past, the possible demise of such a leader might be taken positively by global financial markets, but considering the nation’s instability and possible power vacuum that could be filled by China, an ‘unknown’ could be more concerning than the ‘known’.

By sector, energy was the sole gaining segment, while all others lost ground—led by utilities, staples, and financials. Per FactSet, about a quarter of firms in the S&P have reported earnings so far, with about 40% beating estimates, which is below average for the past five years. In combining the results through last week and estimates for all 500 companies brings us to an estimated -16% drop in earnings on a year-over-year basis. While energy and consumer discretionary are showing the sharpest declines by a large margin, several sectors—such as communications services, utilities, consumer staples, and health care—are actually expected to see earnings growth in the low single digits. So not all is lost.

The Senate approved another $500 bil. for small businesses (and health care purposes), since the first installment bucket emptied fairly quickly, due to the ‘first come, first serve’ format. This is expected to pass the House, although there have been a few political quirks beginning to show up during this process.

Foreign stocks were mixed, as Europe continued to debate the amount of further fiscal stimulus to provide, via a recovery fund, and how plans would be backed. Once again, there has been pushback from Northern Europe, which is hesitant to take on the obligations of Southern Europe (Spain, Italy, Greece). And, as in prior episodes, this slowdown and need for stimulus measures appear to be testing the strength of the Eurozone project. This was in addition to the broader concerns over crude oil prices affecting domestic equity markets. There was little differentiation between developed and emerging markets last week, with commodity prices and broader concerns over Covid outweighing regional concerns.

U.S. bonds were flat on net, with little change in interest rates. Long-term treasuries earned a few percent, which was offset by a decline of a few percent in high yield. The dollar rose by a half-percent for the week, which brought foreign developed market bonds down from a small gain to a small decline. Emerging market bonds also lost a few percent as investors moved away from risk.

Political rhetoric from some politicians about letting some states and localities pursue ‘bankruptcy’, as an alternative to receiving government rescue funds, was a negative for some municipal bond issues. This would require structural legislative change, as states haven’t been allowed to go bankrupt, and the process for cities and counties is difficult. Unlike corporations, which can disappear out of thin air, the geographic footprint of municipal entities makes this much more complicated and less desirable.

Commodities were generally down last week, due to the dramatic negative influence of energy, which offset some gains from precious metals. The futures price of crude oil fell by another -30%+ to not only below $10/barrel, but down to $0 (and briefly a negative -$40—a first), for a time early in the week. As we discussed prior, this was largely due to futures market logistics, specifically a lack of storage. This began to reverse by later in the week with prices back to just under $20. A lack of global demand and abundant supply continue to weigh on energy, as well as commodities such as industrial metals.

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. 

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