by Maurice (Mo) Spolan, Investment Research Analyst
Equity markets declined last week, punctuated by the more than 2% fall across all American indices on Friday. New coronavirus cases have surged in the U.S., and sadly, daily new case numbers are now in excess of those reported at any point during April. Florida and Texas, two of the hardest-hit states in recent weeks, rolled back or paused reopening efforts. Houston’s hospital capacity is at 97%, while Arizona, a state also incurring a recent surge, said that its hospital beds are nearly 90% full. Bellwether companies such as Disney and Apple are halting plans to reengage with customers, as Disney delayed plans to welcome visitors back to Disneyland and Apple closed recently re-opened stores in areas with rising cases. With this all noted, month-over-month measurements of consumer health, such as retail sales and spending, indicate that economic activity has risen considerably since the trough in April.

Heightened volatility is likely to be present for the remainder of 2020 as COVID cases surge and retreat, medical professionals learn more about the disease and update their best-practice guidance, economic data continues to trickle in, and investors price in various scenarios.

by Maurice (Mo) Spolan, Investment Research Analyst
Markets behaved relatively calmly last week as the S&P 500 gained about 2%. Nevertheless, investor attention has returned to the COVID-19 cases trend-line. Twenty-three states are currently reporting increasing cases, including 12 with record daily case figures. Mounting positive tests are the result of increased social activity, which provided for strong May retail numbers as sales increased more than 17% from April’s trough.

Unfortunately, for as long as we are without a vaccine, improving economic data is likely to be met by rising cases. This is because both outcomes are the result of increasing social activity. The financial markets value economic and corporate data, and so we are likely to see asset prices rise or remain steady as such data improves on the back of greater social mobility. Regrettably, however, as noted, this very social mobility seems to be the primary driver of viral spread. The main risk to the financial markets today is that the healthcare system becomes overpopulated as cases rise and additional shutdowns are made necessary. Unless such a scenario comes to pass, we should not expect the market to react unfavorably to rising cases, because rising cases are nearly certain to be accompanied by improving economic data. 

by Maurice (Mo) Spolan, Investment Research Analyst
The S&P 500 touched positive year-to-date performance this past week; however, the levels proved ephemeral as Thursday’s large leg down took the index below where it began 2020. Four of the 25 worst market days in history have now occurred in the past three months, according to Michael Batnick of Ritzholz Wealth Management. It is often futile to speculate upon what causes grandiose single-day market moves, such as what we saw Thursday; nonetheless, it appears in this instance that investors were off-put by Fed Chair Jay Powell’s somber economic outlook concurrent with rising COVID-19 cases in several states which have recently relaxed social distancing measures.

Several authoritative institutions released troubling economic forecasts last week, as the Fed, the World Bank and the OECD all reiterated that 2020 will represent one of worst downturns in modern times. To counter, Chairman Powell shared that the FOMC is “not even thinking about thinking about raising rates.” This exemplifies the seesaw between novel monetary policy and extraordinary economic conditions that is likely to steer asset prices for the visible future. The present climate is so unusual in that the key variables determining economic health – virus-related shutdowns and the corresponding monetary stimulus – are both inorganic mechanisms; a massive external shock has been met with a previously unimaginable flood of money into the financial system. We continue to observe the phenomena closely in order to best align long-term financial plans with the ongoing developments.

by Maurice (Mo) Spolan, Investment Research Analyst
The U.S. stock markets rallied last week, spurred by an employment update which indicated that the U.S. economy added 2.5 million jobs in April, the largest monthly increase since at least 1939. Approximately half of the job gains were the result of furloughed workers returning to their posts, particularly in the travel & leisure sector of the economy. The job number arrives in stark contrast to economists’ expectations, which anticipated that the unemployment rate would expand to near 20% upon the report’s release. While April’s job statistic was a positive surprise, U.S. unemployment remains historically high, at 13.3%.

Since March’s lows, U.S. equity markets have staged their most prodigious 50-day increase of all time, up over 40%. The major indices now rest within a handful of percentage points of their all-time highs achieved in February. It is confounding for many to witness stocks rise amidst a pandemic and the considerable domestic and international political tensions now present. To provide some explanation for this apparent dichotomy, we offer two thoughts. First, a stock price reflects the future profits of the company to which the stock corresponds. Because of this, news and developments are only incorporated into stock prices to the extent they impact company profits. Therefore, events which may be significant in many respects, but do not affect companies’ fortunes, will not play a role in setting stock prices. Second, in the period of time since COVID-19 has proliferated, interest rates have fallen dramatically. Because interest rates are now lower, bonds are less attractive to investors, and as a corollary, stocks look more enticing. In turn, investors have been buying stocks, and stock prices have risen.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equities advanced considerably from week-ago levels as the “great reopening” continued in earnest. Consumer activity has begun to show signs of picking up, and images of large crowds celebrating the holiday weekend in several popular vacation destinations provided visual proof. However, while encouraging from an economic activity standpoint, the images have created a sense of unease for many leaders and have highlighted how difficult it will be to achieve a measured reopening.

The market rebound has continued to remain resilient in the face of a variety of geopolitical challenges. With each passing day, the durability of the US-China trade deal faces tougher tests as the relationship and trust between the two superpowers continues to erode. Not only has the origins of the virus created a growing sense of mistrust, but news that China will impose new national security restrictions in an attempt to suppress ongoing protests in the city of Hong Kong sparked a slew of international condemnation last week. U.S. Secretary of State Mike Pompeo stated that the city of Hong Kong no longer possesses autonomy from the central Chinese government, an issue that could further jeopardize ongoing trade discussions.

Domestically, geopolitical concerns have increased in recent weeks as well, with footage of civil unrest in cities across the country going viral. The relative stability of financial markets compared to the mounting tensions both at home and abroad have underscored the contrast between “Wall St” and “Main St”, and have caused many to continue questioning the strength of the market’s recovery. From an investment standpoint, this dynamic continues to underscore the divergences that can occur between financial markets and geopolitics and serves as further evidence of the difficulty of market timing.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most global equity markets pushed higher last week as more economies continued to take steps toward reopening. Optimism that a vaccine could become available sooner than many anticipated has also helped to boost market sentiment. Markets have remained quite stable over the past several weeks, even as some economic data has begun to paint a very bleak picture. But financial markets are forward-looking entities and are far more focused on the future than the past. In recent weeks, we have seen a significant rebound in the price of oil as air and road travel have both shown signs of recovery. In the U.S., all 50 states have now taken at least some small steps toward reopening their local economies, suggesting that the worst of the economic pain may now be behind us. However, it will be a long and slow recovery, and it will likely take quite some time before economic activity returns to pre COVID-19 levels.

There are also likely to be a variety of lasting issues that persist as we emerge from this crisis, including higher debt levels, poorly balanced state budgets, and an eroded relationship with China. Total authorized spending related to COVID-19 relief has reached about 12% of U.S. GDP, and it is likely that more spending will be required in the near future as many relief programs have now been fully exhausted. Additionally, lower tax revenues and vastly increased unemployment spending has put some states in a very difficult position with respect to maintaining a properly balanced budget, and it is possible that federal aid may be required, placing further strain on the federal budget deficit. Lastly, the relationship between the U.S. and China has taken a clear step backwards as a result of growing speculation surrounding China’s handling of the virus. While China has continued to emphasize its intention to follow through on its end of the Phase 1 trade deal, the rising friction between the two countries is likely to make it even more difficult for a Phase 2 agreement to be reached anytime soon.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Last week brought a continuation of recent trends, where market performance seemed to diverge meaningfully from underlying economic and market fundamentals. U.S. equities ended the week over three percent higher, while the bond market posted small losses. Oil prices built upon the prior week’s gains, rising by over $5 per barrel as countries around the globe continue to take steps toward reopening their economies. However, oil prices remain extremely low compared to historical norms.

The most impactful market news last week was the release of April’s nonfarm payrolls report, which provided a glimpse into the severity of the economic damage wrought by the coronavirus pandemic. The Bureau of Labor Statistics reported that 20.5 million jobs were lost in April, pushing the unemployment rate to 14.7%, the highest since the World War II era. Adding to the pain was a footnote in the report which suggested that the unemployment rate would have been as high as 19.7% if certain workers were classified differently in the data. Job losses were concentrated (but not confined) in industries most affected by social distancing measures, such as hospitality, travel, and retail. No matter how the data is sliced, the impacts of the pandemic on labor markets has been incredible.

However, while economic data and stock market returns do not necessarily measure the same thing, they are undoubtedly closely related, and many investors are struggling to understand the dynamics that have led to the divergence we have observed in recent weeks. Some of this is likely due to the differences in what constitutes the building blocks of the labor markets/GDP, compared to the composition of corporate earnings as measured by constituents in the S&P 500 index. The most impacted sectors of the economy make up a significantly larger component of the employment picture than they do of the S&P 500. Additionally, stock markets tend to reflect forward expectations, while economic data is a measure of the past and present. Taken together, this suggests that while the economic toll has been extremely high, markets anticipate the future to be better.

As we move forward, markets will likely continue to remain hyper-focused on new information that helps to provide clarity on how soon and how expansively economies can resume some semblance of normality. For now, there seems to be some optimism surrounding the re-opening of some economies in Europe and Asia, which have not seen extreme resurgences in the prevalence of COVID-19.  Markets will also be watching the medical community closely, where the White House has reported that it has “fast tracked” 14 potential vaccine candidates in the hopes that one will prove to be effective and can be made available by early 2021. 

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Stocks and bonds in the U.S. were largely unchanged week over week, although international equities in both developed and emerging markets managed to generate relatively robust returns as efforts to reopen economies continued. Investors also got their first look at a very ugly Q1 GDP figure, which came in at its lowest level since the Global Financial Crisis. Q1 GDP, which declined at an annualized 4.8% rate despite containing over two months of relatively stable economic activity, is expected to pale in comparison to the contraction anticipated for Q2. Though estimates are extremely difficult at this point in time, some economists are calling for Q2 annualized declines of up to 40% (although these estimates vary wildly depending upon the source). Unemployment data is expected to be equally bad, with some calling for that figure to reach as high as 20%.

Three of the world’s major central banks (the Federal Reserve, the ECB, and the Bank of Japan) held press conferences last week and announced continued adjustments to their respective policy initiatives. “Flexibility” was the theme of the week, as bankers hinted that they would be looking to do all that is necessary to preserve liquidity in markets and keep capital flowing to where it is needed. In the U.S., Fed Chairman Jerome Powell announced a further expansion of the bank’s “main street lending program,” making it available to more businesses and lowering the minimum loan size.

Also offsetting some of the market’s ire over the economic data were reports that an antiviral drug developed by Gilead Sciences was showing some promise in clinical trials. The preliminary clinical trials for Remdesivir (as the drug is called) were discussed in detail by Dr. Anthony Fauci during his daily press conferences last week. Dr. Fauci’s apparent confidence in the drug’s promise was quickly followed by announcements that the FDA would likely fast track its path to broader use in severe cases of COVID-19. It is important to note that the drug does not represent a cure for the disease, but it may help to improve patient outcomes. As the scientific community around the world remains fully mobilized, we expect that this will not be the last of promising developments with respect to our ability to fight the virus. However, an effective and well distributed vaccine will likely be required before we can finally put the COVID-19 pandemic behind us.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most global equity markets moved modestly lower last week as updated manufacturing data came in at record low levels and an additional 4.4 million Americans filed for unemployment insurance. In the past five weeks, over 26 million people have filed for unemployment benefits, which represents about 16% of the U.S. labor force. Furthermore, the supply and demand imbalances that the global shutdown has created in the economy have been enormous, particularly in some commodity markets. Global stay-at-home orders have evaporated the demand for oil, and storage facilities are nearing full capacity. On Monday afternoon, oil prices turned negative for the first time in history as traders were forced to pay counterparties to take barrels off their hands as storage costs skyrocketed. Prices stabilized a bit as the week progressed, but many investors have understandably been asking how such price fluctuations could be possible. The intricacies of the oil markets are quite complex, but the core of the issue is the imbalance between supply and demand, combined with only limited storage capacity in the supply chain. As oil has continued to be pulled from the ground despite limited demand for the final product, storage facilities have approached full capacity. Oil contracts between buyers and sellers settle with physical delivery of the product, and buyers must pay for the storage. But with storage facilities at full capacity, these costs have skyrocketed.

Despite the eye-catching economic data and significant dislocations in commodities prices, equity markets have recovered strongly from their March lows as a result of rising optimism surrounding the reopening of global economies. However, any such reopening must be implemented carefully and in multiple stages. We expect this to be a long process, with additional bouts of market volatility along the way. The resumption of “normalized” economic activity will not occur at the “flip of a switch,” as it will also require a recovery of confidence within society, which will take time. Thus, the ultimate economic recovery will likely not be fully achievable without a solution from the medical community (via vaccine or effective therapeutic). Most credible sources seem to suggest that such a solution is more likely to arrive in 2021 than in 2020, setting the stage for a potentially longer event than some optimists seem to anticipate. However, we continue to remind investors that while its effects may be with us for another year or more, the COVID-19 pandemic will be transitory in nature. As long-term investors, it is important to remain focused on the temporary nature of these challenges and remember that the long-term earnings power of markets will remain intact. 

by Connor Darrell CFA, Assistant Vice President – Head of Investments
U.S. equities (as measured by the S&P 500) continued their bounce from last month’s lows last week with investors seemingly more focused on the spread of COVID-19 than on economic fundamentals (which continue to deteriorate). Further fueling investor optimism was a growing sense that Congress would move toward passing “Phase 3.5” of economic stimulus. In fact, reports emerged Monday morning that the general belief in Washington is that something will be passed by the end of this week. The ideas being proposed include an expansion of the Paycheck Protection Program (PPP), an additional $60 billion allocated to the SBA disaster relief fund, and additional federal funding for hospitals and COVID-19 testing kits.

Q1 earnings season also kicked off last week, with several of the nation’s largest banks providing investors with the first sense of how corporate leaders are assessing the current environment. During investor calls, JPMorgan, Bank of America, and Wells Fargo all provided a rather bleak near-term outlook and cited historically high levels of uncertainty. The extreme uncertainty across markets is also succinctly represented in current S&P return forecasts, where the difference between the most bullish and most bearish wall street estimates stands at its widest level in history. We continue to remind investors that in such an uncertain environment, the importance of discipline and maintaining a focus on long-term objectives cannot be overemphasized. In the near-term, there are a variety of factors that can move markets in either direction, but in the long-term, we can say with a very high degree of confidence that markets will achieve new highs once again.