Market analysis

3.30.20
Market News

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.

3.3 million

The number of Americans who filed for unemployment insurance last week.

“Rating agency downgrades and defaults will likely rise and volatility will likely persist, leading us to favor higher-quality bonds within credit exposures.”

- Bill Merz, Senior Portfolio Strategist, Head of Fixed Income Research, U.S. Bank

Term of the week

 

Stimulus package – Economic measures, including spending, put together by a government to stimulate a contracting economy. The objective is to prevent or reverse a recession by boosting employment and spending.

Global economy

Quick take: The U.S. economy is tumbling into a recession, with COVID-19-related disruptions stifling economic activity.

Our view: While the full extent of damage to the labor market remains to be seen, initial indications are concerning. More impairment could mean a longer “muddle-through” period for the economy in the aftermath of COVID-19’s peak.

  • 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 markets

Quick take: Uncertainty around corporate earnings growth in the face of COVID-19, depressed oil prices and slowing in the pace of global growth are among reasons to remain cautious in the near term.

Our view: Despite monetary and fiscal stimulus, we expect volatility of equities to remain elevated as long as the duration and impact of COVID-19 remain unknown, oil prices stay depressed and earnings visibility is murky.

  • 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.

Bond markets

Quick take: U.S. Treasury yields held near all-time lows and riskier bonds rebounded slightly last week after large-scale government efforts to stabilize markets and ease borrowing costs. Corporate and municipal bond prices remain depressed (yields are high) as COVID-19 continues to spread at a rapid pace and stay-at-home orders expand.

Our view: Fiscal stimulus and monetary easing have improved liquidity and market functioning, but ongoing market volatility is likely. We recommend a defensive posture with an ample high-quality bond allocation.

  • 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.

Real assets

Quick take: Most real asset sectors performed well last week due to the implementation of Fed programs and the stimulus bill passed by Congress.

Our view: Sectors not explicitly backed by Fed and government support, such as commodities, were flat to lower. We expect this trend to continue due to large supply/demand imbalances.

  • 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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