At a glance
Stock markets rebounded as the Coronavirus Aid, Recovery and Economic Security (CARES) Act was signed into law. The law provides $2 trillion in spending to support the economy as we weather social distancing measures for COVID-19. The economy appears likely to contract into next quarter based on the expected duration of social distancing measures.
- Unemployment insurance claims skyrocketed, with 3.3 million Americans filing last week, by far the most in U.S. history. Layoffs roiled the services sector of the economy and sent the broad unemployment rate up at least 2 percent. Further job losses are likely in the coming weeks as social distancing policies continue to be enacted across the country.
- Global business activity and confidence surveys showed developed economies worldwide falling into deep contractions. Service sectors were more impacted than manufacturing, though both suffered from the impact of the response to COVID-19.
- A $2 trillion stimulus package passed in Congress and was soon signed by President Trump. The relief package contains loans to businesses and governments, direct payments to families and tax cuts, among other assistance measures. It is the largest aid package in U.S. history and may be followed by further stimulus in the coming weeks.
- China’s industrial profits shrank at by far the fastest pace on record in February. Much of the recent equity market volatility has hinged on divergent investor expectations for corporate earnings. Given China’s experience, we expect acute weakness in profits worldwide as distancing policies continue.
- Equity performance remains subdued, with all 11 S&P 500 sectors declining 14.2 percent or greater year to date, despite unprecedented monetary and fiscal stimulus. The Energy (-52.3 percent) and Financial (-31.6 percent) sectors are the worst performers; Information Technology is the best-performing sector, declining a more modest 14.2 percent.
- The slowing pace of global growth and rising crude oil supplies are weighing on the Energy sector. Slow economic growth and low energy prices are elevating the possibility of higher loan default trends, a negative for the Financials sector.
- The longer-term trend toward e-commerce, artificial intelligence, machine learning and cloud computing are bolstering the relative performance of the Information Technology sector.
- The dividend profile of U.S. equities remains relatively attractive, with nearly three-fourths of S&P 500 companies offering dividends yielding above the 10-year Treasury yield of 0.68 percent.
- The first quarter reporting season is unofficially slated to begin during the week of April 13, upon the release of results from several money center banks. The magnitude of disruption caused by COVID-19, solvency, ability to pay dividends and status of supply chain logistics are among items that will be watched closely.
- The Federal Reserve (Fed) has taken a host of extraordinary measures to restore liquidity and the flow of credit to businesses. The Fed purchased $125 billion in Treasury and government-backed mortgage securities per day last week in a signal that government bond yields will remain low and prices high for some time.
- Corporate bond prices rallied last week. Incremental yield compared to Treasuries remains very wide by historical standards, but a far cry from levels experienced during the 2008 financial crisis. Rating agency downgrades and defaults will likely rise and volatility will likely persist, leading us to favor higher-quality bonds within credit exposures.
- Municipal bond yields fell considerably (prices rose) last week after disjointed trading and extreme volatility two weeks ago. Despite this drop, yields in municipal bonds remain high compared to Treasuries and similarly rated corporates by historical comparisons. High yield municipal bond yields are close to normal historical levels, indicating investors seeking opportunities should look elsewhere for relative value.
- Lodging and other beat-up sectors in the real estate investment trust (REIT) market performed well last week. However, the retail sector (mall properties, for example) did not participate in the rally.
- We expect utilities to be the best-performers among these defensive stocks if economic growth deteriorates further, followed by REITs.
- One or more of the major oil producers need to decrease production to bring supply and demand back into balance. Evidence of oversupply is beginning to manifest in the crude market; rig counts fell dramatically and prices of crude at the wellhead are trading at huge discounts.
- Due to low interest rates and the Fed essentially providing unlimited liquidity to many sectors, there is price support for gold. Mining companies could perform very well in this environment, because energy is their largest cost and those prices have declined significantly.
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