On April 29th the market saw the highest finish since the rally began with the S&P closing at 2,939 last Wednesday. From the recent low on March 23rd, the S&P 500 has risen 27% and volatility as measured by the CBOE volatility index (VIX) has decreased significantly from its March 17th high of 82.7. At the start of the rally the VIX was 61.6 and it finished Monday at 36. The recent lift in the market and dampening of volatility coincide with the massive global support from central bankers and legislators globally. The vast amounts of fiscal and monetary stimulus were key in stabilizing and reopening the credit markets. These actions allowed the markets and investors to catch their breath and more rationally examine what the impact of the Covid-19 outbreak could be for the global economy and economic markets.
In the back half of this week, the market is going to be focused on the labor markets as we get a string of employment reports starting Wednesday with the ADP employment report. This report will be used as an indicator as to what to expect from the payroll reports on Friday. On Thursday we will get another initial jobless claim report, while down from the highs, is still expected to tally an additional 3 million initial filers. On Friday we will get the monthly payroll data, which has many components, but the headline number will be the unemployment rate, which is estimated to be in the mid-teens, up from 4.4% last month. This will be the first report since the initial jobless claims spiked in late March.
While the markets may be focused on economic reports, everybody is focused on the reported cases of the covid-19 and if the states entering the re-opening phase are seeing an increase in infections and if the country can move forward in this process. It will require some time to make any clear conclusions as it takes the virus time to incubate after the person is exposed. There is no doubt that there is immense pressure on officials, as a real division between those that want to reopen quickly and those that believe we need to proceed cautiously is building. Everyone is also anxiously reading every new medical report looking for evidence of a cure or a vaccine. We have seen some encouraging signs, but would caution that development of treatments and vaccines is a complicated process. It takes time and data to safely develop these products and it is important to remember that when reading about new potential breakthroughs.
The next debate for the markets as the economies reopen is how quickly can the economy recover. Economist will use all kinds of letter and diagrams to describe the shape of the recovery, including the U, V and W (double dip) for example. The pace will be determined by the speed and breadth of the re-openings, trajectory of the new virus cases and mostly consumer’s confidence to return to their more normal habits. It will take time to determine what normal looks like in the post Covid-19 era.
For the moment it does not appear we will see much movement out of congress on their next stimulus effort. The leadership has said they are pushing the pause button for now. This will allow them time to study the impacts from the virus and target their next response to the areas most needing support. Congress is still not in full session and the house has delayed their return to Washington by at least a week. To pass a bill remotely it requires unanimous consent and it is unlikely the next round of stimulus will meet that hurdle. We would expect any incremental stimulus legislation to be much more contentious and require many rounds of debate and negotiations.
Looking forward risks do remain elevated until we get more answers on the economy and the pace that we can move from the full stop position to a more normalized activity. 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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