April fool’s day was no joke unfortunately with the S&P 500 moving lower by over 4%. Despite that start to the month, the market has been performing better recently since reaching its low on March 23rd. We closed out the quarter on a more positive note for the market, but we still have a way to go as our economy will likely be on hold for a period of time to come. While the markets are getting more settled and people are getting used to their new social distancing routines, it does not detract from the seriousness of the daily news reports regarding the virus.
Central Bankers and Legislators have done their part.
The markets are seeing support come in two steps to get through the Covid-19 outbreak. The first step is the fiscal stimulus to stabilize the liquidity in the credit markets. Globally central bankers are putting in a coordinated effort to support the dislocation in the markets with steps that are faster and larger than what we witnessed in the 2008-2009 financial crisis. To date there have been over 100 central bank rate cuts. In addition to cutting rates, many central banks are re-instituting many of the Quantitative Easing (QE) programs that they used to stabilize the markets in the past crisis. The good thing about history is you can reflect on what worked in the past and put it to good use. We have that luxury due to the last financial crisis and they have been quick to use it. The credit markets have been hit from two sides, the liquidity demands from businesses as they try to deal with the sudden drop in demand from the economy and the large withdrawals from bond mutual funds creating forced selling. The bond withdrawals have been to fund liquidity and have added stress to the market. The central bankers are filling that void and have pledged to continue supporting this market. The improved liquidity has been a welcome relief as we have seen negative impacts in both the corporate credit markets and the municipal bond market. It is not a surprise that money moves towards “safer” assets with economic uncertainty but the move in investment grade bonds has been much sharper than expected. We would expect as liquidity improves, so should performance of corporate bonds but for some corporate borrowers the economic slowdown will have impact. The municipal bond market has seen the benefits of the new programs and rates have tightened nearly as fast as they moved up.
The second step is providing fiscal stimulus to support the economy. Not wanting to be outdone by their central bankers, governments globally have also been acting with resolve, as they try to build an economic bridge to get us past the induced economic coma necessary to defeat the corona virus. Global leaders have made over 30 fiscal stimulus moves that total approximately 2.3% of the global GDP including the $2 trillion stimulus package, being referred to as the Cares Act, passed by the US Congress. These swift actions are very important as the distancing policies are having a dramatic impact on economic activity, especially in the service areas of the economy. The latest weekly jobs reports demonstrate the impact these actions are having. While not unexpected but still shocking to read, we have posted record jobless claims two Thursdays in a row of 3.2 million and 6.6 million, respectively. We expect to continue seeing negative economic data for some time. With the CARES Act finalized by Congress and signed by the President, they can now focus on implementation which is going to take weeks to get funds out to consumers and the SBA Paycheck Protection Program will start taking applications Friday, April 3. Despite what seems like long implementation timelines for those needing the funds, it should be recognized that this stimulus is coming at a record pace and a very positive response to this crisis.
The markets have been bolstered by these important steps to stabilize the credit markets and the economy. It seems premature to say that the market has bottomed, and equities are not particularly “cheap” at this time given the uncertainty in earnings. It is true the economic shut-down is self-induced, but when we can put the foot back on the accelerator for economic growth is still indeterminable. Over the weekend the administration extended the social distancing guidelines through the end of April and a further extension is not out of the question. How quickly we can return to a normal pace of life is also an open-ended question, as it is not likely that a vaccine will be developed and broadly available until early 2021. Despite being down from their extreme levels, volatility measures like the VIX (CBOE Volatility Index) remain elevated due to these uncertainties in the market.
Oil markets still under pressure
Commodities remain under pressure, especially oil. As the economy gets put on hiatus globally, there is a sharp demand impact for all the commodities but most especially oil as every truck halted, every plane grounded and every ship left at the dock consume oil, not to mention all the cars parked as many workers are staying home. Oil is already pricing in a significant slowdown in demand, but it could go lower if the global shutdown persists. This not only impacts the energy producers and the jobs they provide; it also impacts the bond market as a number of US producers have debt outstanding and it impacts the emerging markets as a number of countries are energy providers. In addition to the supply concerns we are still not seeing any signs of relief from oil producers. Russian and Saudi Arabian leaders have remained resolute in their positions on the market and their price war. While some OPEC members have called for an emergency meeting, Saudi Arabia has shown little interest in participating. The OPEC production cuts officially expired April 1st. Market participants will be watching closely how quickly and how far Saudi production is increased. In the US, producers are sharply cutting their capital budgets, and this is showing in the declining activity of North American drilling rigs. It will take time for it to impact US oil production, but it will eventually curb our oil output.
Where to from here?
As we have talked about previously the market and investors hate uncertainty and that is not going away, but we will be getting better data every day. Many activities are triggered by a flip of the calendar including rent and debt payments. We are crossing our first month end since the most serious economic steps were taken, and it will bear watching any implications this new month brings. The actions taken by the Fed are having positive implications on the credit markets. Washington has completed their stimulus bill which should support the economic recovery once the virus outbreak has been slowed and the quarantines are lifted. What does that mean for the markets, especially the equity markets, is there are still lots of questions to be answered. We would expect the volatility to dampen as the liquidity in the markets improve but, we would caution about trying to time the market. The central bankers and legislators have done their part, but it has little impact on how the virus responds to the containment efforts. It is likely the market will start finding its footing when the news gets less bad, not when we start getting good news. The markets are very good at anticipating change and can have several false starts at the optimism along the way. We have always stressed having a good plan developed around your risk tolerances. Those plans should be made in times of calm in anticipation of time like these. In times of anxiety rethinking those plans lead to actions that can harm investors not help them. This will remain an evolving story as we all look forward to the day when we can get back to work and our normal everyday activities.
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