The past few months have been historic. The coronavirus pandemic shoved our slow-growth economy into recession, putting an end to the 11-year stock bull market—from a human, economic and investment viewpoint, the virus’ spread has taken a swift and steep toll.
Despite April’s strong rebound, through Thursday, April 30th the Dow Jones Industrial Average and the broader S&P 500 index were down 14.1% and 9.3% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 17.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index had dipped to 1.31%, down from 1.40% last week. On a total return basis, the U.S. bond market has gained 5.0% for the year.
The logic doesn’t seem to square: More than 30 million Americans applied for unemployment benefits over the last six weeks, while the S&P 500 and Dow Jones Industrial Average ended April with their best monthly percentage gains since January 1987, up 13% and 11%, respectively.
The disconnect between the dismal economic and earnings data and the market’s rally is as wide as we’ve seen in our more than 25 years in the investment business. The full economic and human toll of the coronavirus and actions taken to combat it won’t be known for some time, but the stock market is forward-looking, and last month, traders were quick to embrace hopeful signs.
Job Losses Cut Consumer Spending
First-time unemployment claims “slowed” this week to 3.8 million filers. Over the last six weeks, more than 30.3 million workers have been let go—that’s almost 19% of the U.S. workforce. It’s no surprise that record job losses have led to a record drop in consumer spending—most people cut back on their expenses where they can when they lose their income. Shelter-in-place practices only compounded the impact. Consumer spending fell 7.5% in March—the biggest monthly drop since records began in 1959, and far more than the previous record decline of 2.1% in January 1987.
There will be many knock-on effects of so many people losing their jobs at the same time, but we’ll have to wait and see the full extent of the damage. For example, it will be months before we see what’s happened to household debt levels and bankruptcy rates for individuals and businesses.
Market Condition
Market is in a confirmed uptrend, as the market continues to trend along its shorter-term moving averages. Basically, from the March 23rd low, the market has rallied 35% to the April 29th high. At this point it would not be unusual for a pullback as the marked digest these huge gains, and consolidates waiting for additional economic data to catch up to the market. Most likely the lows were put in March, but it would be normal to see some consolidation and/or near-term weakness.
Things we are watching, which will give us some more information as to the direction of the market and the economy.
Corporate earnings started out with favorable reactions which quickly faded towards the end of last week. So while the reactions faded, in widely held names like Alphabet (GOOGL) Facebook(FB), Tesla (TSLA) , Apple (AAPL) and others, they still managed to stay above key levels. More reports over the coming weeks will tell the story.
Unemployment claims continue to sore, the unemployment rate is expected to reach 17% when April numbers are reported this Friday, the highest reading since 1948.
On one hand we have $5 trillion worth of monetary stimulus and $3 trillion of fiscal stimulus which is propping up the market, on the other hand economic growth has collapsed. It would not be unusual for the real world economy to cause some short term volatility in the equity market.
Shorter term economic data (High Frequency Data) is showing improvement in air travel, gasoline usage, hotel occupancy and rail car traffic. We are watching this data closely as some re-opening of the economy takes place.
There is talk about another stimulus package which could include a payroll tax cut, very favorable for the economy.
The market may have been anticipating a major re-opening. While some states are reopening others are extendingtheir lock down periods. This may cause confusion and volatility in the market. At the last count, 7 states plan on lifting their order, 18 states are partially reopening, and 26 states are still shut down.
The Fed stated it will continue to keep short term rates near zero and it will continue expanding its balance sheet.This is equally reflected in the massive increase in the M2 money supply.
With all this stimulus many are expecting inflation, it still has not showed up but this is something to be monitored inthe future.
There is now talk of punishing China with tariffs for the handling of Wuhan Virus. This kind of talk has sparked morefears of trade wars which would weigh on the market.
Summary
We are at a point where the economy needs to re-open. For now the unprecedented monetary and fiscal policies have propped up the market, hopefully it can sustain us until the economy turns upward. Initially a massive shut down was due to a lack of data on the virus; the infectivity, mortality rate, and vulnerable populations. Now that we have more data, several treatments, prepared hospitals, and vaccines in development, targeted openings along with protecting vulnerable demographic groups would be prudent. A prolonged economic slump with ensuing poverty can also cause the loss of life. Confusion on policies, or politicians using this crisis to further ulterior agendas can be very damaging to the economy. While we expect volatility , we are optimistic that over time the crisis resolves, it always does. Investors with long term outlooks should consider any near term weakness as rare buying opportunities. It will be a bumpy ride.
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