Economic Data Watch and Market Outlook
We have seen over the past several weeks a tale of two markets, specifically the difference in performance between the equity and fixed income markets. Equity prices are being influenced primarily by news regarding COVID-19, its flattening of the “curve” and when the U.S. cities and the economy will re-open for business. This hope for Americans of regaining some semblance of a normal life, has driven the S&P 500 (closed on Friday at 2836.74) higher by an estimated 25.0% since bottoming out at 2237.0 on March 23. This is despite Q1 S&P 500 earnings reports showing that for the 24% of companies having reported, earnings are estimated to have declined by -15.8%, which would be the worst quarterly showing since a -31.9% drop in Q2 2009. Conversely, large segments of the bond market remain dislocated in securitized credit, bank debt, and below investment grade debt. Bond investors remain leery of the potential for an increase in corporate downgrades (Moody’s has already downgraded an estimated 600 companies), a rise in default rates and worsening corporate balance sheets across several industries including energy, leisure and hospitality. At some point, we would expect fundamentals will begin to drive market and security prices, and there will be further risks to the downside.
As we enter next week’s trading sessions, the markets will be inundated with an avalanche of corporate earnings (172 S&P 500 companies are reporting) and economic data reports. Mainstays of the S&P 500 will be closely watched with earnings releases coming from Microsoft, Apple, Amazon, Alphabet the parent of Google, and Facebook. Other notable companies reporting will be Exxon Mobil, Chevron, Pfizer, Gilead Sciences, Merck, 3M and Boeing. It is expected upcoming economic data releases will continue to show the U.S. economy is nose diving into a deep, but hopefully short-lived recession. Recent economic data releases are maintaining a trend of declining to multi-year lows, as the University of Michigan Consumer Sentiment index and Durable Goods Orders just hit an 11 and 5 ½ year low respectively.
In turning to next week’s economic calendar, the releases of note will be Q1 GDP, the Conference Board Consumer Confidence Index and comments from the FOMC meeting regarding its outlook of monetary policy and US economy. On Tuesday, we begin with the Conference Board Consumer Confidence Index where the forecast is for the index to plunge 45 points to 75.0 in April.
Real GDP for Q1 out on Wednesday is expected to fall by 9.9% on a seasonally adjusted annual basis. This would equal the weakest quarter on record based on data going back to 1947. A majority of the weakness is due to an estimated 17.3% decline in real consumption during the quarter. The sharp drop in spending due to the spread of COVID-19 is expected to manifest itself in other economic reports yet to be released.
On Thursday, real Consumer Spending is projected to have fallen by 14.7% in March while nominal spending declined by 14.9%. The PCE price index is estimated to have dropped by 0.2% in March taking the annual rate to 1.3%, while the core price index declined 0.05% to an annual rate of 1.7%. Much of the decline in the recently reported CPI and PPI, reflects the outsized drop in energy prices.
The Week In Review
U.S. Equities
US equity markets declined on the week as investors scrutinized worsening economic data, the decline in corporate earnings and $484 billion aid package to combat the COVID-19 induced economic recession.
- Dow Jones -1.90% MTD, +8.61% YTD, -16.08 B. S&P 500 -1.30%, MTD +9.88%, YTD -11.66%
- Russell 2000 +0.33%, MTD +6.99%, YTD -25.76%
Drives: I) President Trump last Friday signed into law the much anticipated $484 billion COVID-19 aid package that includes a second round of financing for small businesses under the Paycheck Protection Plan (PPP). The bill contains another $320 billion to assist small businesses. It also contains an estimated $75 billion in help for hospitals, $25 billion for COVID-19 testing and $60 billion for the SBA’s Economic Injury Disaster Loan program.
II) Existing Home Sales in March dropped by 8.5% to 5.27 million units on a seasonally adjusted annual rate. This large drop came after the trend had been improving through February. Existing home sales are registered when transactions are completed, thus the March data probably (mainly) reflect sales based on signings that were completed before the spread of COVID-19. Breaking out the housing data by quarter, existing home sales still rose 4.8% on an annual basis in 1Q, despite the sharp March decline.
III) The Market Manufacturing Flash PMI for April reported a decline from 48.5 to 36.9, while the services PMI dropped from 39.8 to 27.0. The steep declines for both were in range with the consensus estimates. The manufacturing survey reading was the lowest since the Great Recession, and the services report was the lowest on record (dating back to 2009). The data was collected between April 7 and 22, post the COVID-19 shut down.
IV) Durable goods new orders in March fell 14.4%, coming in below expectations. The reading was negatively impacted by the severe decline in transportation and aircraft order, which came in at a -$10 billion for the month caused by order cancellations. The core capital goods report ex-aircraft and defense, actually beat expectations easily even thought there was a softening in orders (0.1%) and shipments (-0.2%).
V) Equities Month to Date are higher with Large-Cap, Growth, Energy and Consumer Discretionary leading equity price performance. The laggards for the period are Small-Cap, Value, Industrials and Financials.
Capitalization: Large Caps +9.99% (YTD -12.25%), Mid-Caps +9.77%(YTD -19.95%) and Small Caps +6.99% (YTD -25.76). Style: Value +5.49% (YTD -32.26%) and Growth +7.54% (YTD -20.12%). Industry Groups: Healthcare +13.22% (YTD -1.08), Technology +10.23% (YTD -2.89%), Information Technology +10.14% (YTD -3.89%), Consumer Staples +7.71% (YTD -6.23%), Consumer Discretionary +7.71% (YTD -6.23%), Utilities +5.12% (YTD -8.93%), Communication Services +10.18% (YTD -10.36%), REITs +6.55%(YTD -13.89%), Materials +10.61%(YTD -18.33%), Industrials +4.26% (YTD -23.86%), Financials +4.49% (YTD -28.76%) and Energy +18.99% (YTD -41.05%).
European Equities
The MSCI Europe Index was lower last week by -1.82% as investors were disappointed the EU did not reach an agreement on a stimulus package and amidst doubts cast over a promising COVID-19 treatment.
Drivers: I) Leaders of the European Union passed on an agreed upon €500 billion ($542.15 billion) COVID-19 relief package, but were stymied from agreeing on a longer-term recovery plan that could exceed trillions of euros. ECB President Christine Lagarde warned the euro-zone economy could decline by more than 15.0% in 2020. The EC is expected to present a European Recovery plan at its next meeting in a few weeks. The main issue is whether aid will be provided as loans or outright grants.
II) The Markit composite Euro-zone flash PMI estimate for April plunged 16.2 points to 13.5. This is the lowest reading on record, with the previous low of 36.2 seen during the 2008 2009 GFC. Based on this data, the PMI reading is consistent with a 27.0% annual decline in economic activity. Early estimates from economists are projecting a 15.0% decline in Q1 GDP, followed by a historical drop on 45.0% in Q2. The PMI is expected to see a sizable rise in May as social restrictions are gradually eased across countries.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -1.82% for the week (MTD +1.32%, YTD -23.33%).
Asian Equities
Asian equity markets fell last week as equity prices remain sensitive to the rise and fall of new COVID-19 cases. The Dow Jones Asia Index was lower by -1.79% for the week, (MTD +4.80%, YTD -17.62%).
Drivers: I) Despite weak external demand due to the coronavirus pandemic, Taiwan’s exports rose by a noteworthy 4.3% annualized rate in March and a 5.8% month over month. This follows a 1.1% month over month decline in January and February. Demand for technology related goods led the upside surprise as China’s supply chain activity began to reawaken. Tech orders jumped 18.4% m/m after dropping 3.8% in January and February.
II) In Japan, the composite PMI after plunging 10.8 points in March dropped by another 8.5 points to a record low of 27.8 in April. The declines on a cumulative basis over the past three months hit 22.3 points. The services PMI was the main drag, falling by 11.0 points to 22.8 in April, after a sharp drop of 12.9 points in March. While the rate of the decline slowed, the April decline has pushed the index far below the record low of 33.7 recorded in February 2009.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -3.19% (MTD +1.82%, YTD -17.75%), the Hang Seng Index fell by -2.25 (MTD +1.00%, YTD -15.06%) and the Shanghai Composite declined by -1.06% (MTD +2.12%, YTD -7.92%).
Fixed Income
Treasury yields fell last week, as investors continued to seek a safe haven in light of continued expectations economic growth will be negatively impacted by the spread of COVID-19.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.605% down from 0.643%. The 30-year yield declined last week finishing at 1.176% down from 1.265%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.24% last week, MTD +1.78% and YTD +4.99%. The Bloomberg Barclays US MBS TR was higher by +0.07% last week, MTD +0.32% and YTD +3.14%. The Bloomberg Barclay’s US Corporate HY Index declined by -2.10% for the week, MTD +3.63% and YTD -9.52%.
Commodities
The DJ Commodity Index was lower last week by -5.13% and is down month to date -7.66% (YTD -33.23%). The commodity index decline was driven by the trend of lower demand for energy and agricultural products around the globe.
Performance: I) The price of oil dropped last week by -5.18% to close at $17.18 and is lower month to date by -16.11% (YTD -71.86%). Oil futures experienced a record decline of 32% last week, and at one point the future fell to a negative price for the first time in history, due to oversupply and diminishing storage capacity.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +0.57 ending at 100.29 for the week (MTD +1.25%, YTD +4.04%). The USD was higher last week as global investors remain fixated on the impact COVID-19 will have on global growth and consumers.
III) Gold rose last week as investors digested mixed economic data and uncertainty in the equity markets. Gold was higher by +3.02% last week, rising to $1745.7 (MTD +9.33%, YTD +14.61%).
Hedge Funds
Hedge fund returns in April are higher with the core strategies, Equity Hedge, Event Driven, Marco/CTA, Relative Value and Multi-Strategy all in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +2.19% MTD and down -4.81% YTD.
- Equity Hedge has advanced by +3.12% MTD and lower by -10.63% YTD.
- Event Driven is up MTD +1.93% and is down YTD -3.68%.
- Macro/CTA has risen by +0.96% MTD and is down -0.23% YTD.
- Relative Value Arbitrage has climbed up by +2.39% and is lower -3.17% YTD.
- Multi-Strategy is up MTD at +2.30% and has dropped by -3.24 % YTD
Data Source: Haver Economics
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