The market continues to trade near the recent high set on April 29th of 2,939 for the S&P 500. Stocks have not really been impacted by the recent economic reports and seems to be taking a wait and see approach to what comes next on both the economic and virus front. We continue to see good participation in new debt offerings and market volatility, as measured by the VIX, has continued to progress towards more normal levels.
As expected last week the labor reports highlighted the impact of the global shutdown to try and slow the spread of the COVID-19 virus. The weekly jobless claims report showed continued job losses even as parts of the economy are starting to re-open. The reported unemployment rate, while still very high, was better than expected at 14.7% compared to the estimated 16%. But economist have cautioned that the number is understated because it doesn’t fully capture those that believe they are only out of work temporarily due to the stay at home orders. The Bureau of Labor Statistics has estimated that those may have added five percentage points to thee unemployment rate if they were counted. We also had a glimpse in the deflationary impact this slowdown is having, The Consumer Price Index was reported this morning falling 0.8% month over month, 0.4% if you exclude food an energy. Not a surprise when you have demand artificially reduced like it was in April. When comparing to last year, prices are still up slightly, but the run rate of inflation slowed in April from 1.5% to 0.3%. This means there will be little to no pressure on the Fed to move rates higher while inflation is at the subdued levels.
All eyes have been focused this past week on the reopening of the economy. Right now it feels as if we are on a See Saw at the playground with the virus on one end and the economy on the other and we have to find the right balance between the two. What will be most interesting to observers is not the pace the stores open, but rather the level of consumer confidence to go back to their previous routines. In other regions around the world, the return to prior activity has been met with caution and at a more measured paced than some expected. Early anecdotal evidence seems to be a cautious response rather than a sharp rebound in activity. It’s probably reasonable to expect this will be the case as we enter the summer months with some people returning to normal activity levels while others looking for more comfort in slowing infection rates or more breakthroughs on the medical front. If the recovery is at a slower pace, pressure will mount for Congress to take further action to not only extend current benefits being provided to workers, but to take additional steps to support the economy. We are starting to see proposals of an additional $1 Trillion in federal stimulus, but we are also seeing the contention around these efforts increase. It has rarely been discussed of late with all attention focused on the matter at hand, but this is an election year and that will play a role in the debates on any future legislation. We are only six months away from the elections and it will be interesting to see how this shapes the outcome for not only the White House but also the make-up of Congress.
If you look at the headline numbers, it appears the market is doing well given what is happening to the broader economy. The S&P 500 is only down nine percent from the 2019 close. But the strength of the rally is not broad based and is concentrated in certain sectors and in the largest market cap names. The Nasdaq 100 index, which is a market capitalization weighted index of the largest 100 names listed on the Nasdaq, is up 6.5% for the year due to its heavy concentration of technology related names. Size and growth remain the top performing factors in the markets, which has led to this concentration of returns. The value side of the ledger continues to be largely ignored in this market recovery which has led to a real bifurcation of returns when investors are looking at their portfolios.
The credit markets have remained open since the Fed stepped in to support the liquidity on March 23rd. Part of that support was just through providing confidence to the market that they would be there if needed. We have seen the new issuance market for corporate issuers open up, with many companies needing additional liquidity receiving it. Spreads on corporate bonds are still elevated but companies have been able to access what they need for the most part. According to Bloomberg, April was a record month for investment grade bond sales totaling more than $300 billion. One program announced by the Fed on March 23rd was its intent to purchase corporate bonds and ETF’s holding corporate bonds. The Fed launched that program today with the purchase of ETF’s holding broad corporate bond portfolios. This could lead to direct purchases of corporate bonds in the future. While yields may stay elevated due to the supply of new issuance, it appears liquidity will not be a concern for these borrowers.
Looking forward risks do remain elevated until we get more answers on the economy and progress on the disease front. The outlook is improving but investors should remain vigilant. We are just starting to see the true economic impact of the virus and what the longer-term implications are for the economy and the markets. We would continue to expect rates to remain low for an extended period of time, the equity markets will be taking its cue from the economic outlook and if it will have a hangover effect on 2021 earnings. Credit spreads remain elevated for corporate bonds reflecting some of those economic concerns. Investors should remain focused on their long-term investment plans. We continue to reinforce that in times of stress, investors should follow their investment plan and not attempt timing the market. If you are uncertain about your plan and level of risks you are taking, speak to your advisor.
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