Economic Update 5-11-2020

• 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.

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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