Economic Data Watch and Market Outlook
The S&P 500 has rallied approximately 25.0% from its low of 2237.40 reached on March 23, on hopes the US economy and corporate earnings could stage a V shaped recovery post the worse economic decline we have seen since the Great Depression. The positive investor sentiment has been engendered by a flattening and drop in the COVID-19 curve, news that a number of states in the US were re-opening or planning to re-open in the coming weeks. Sentiment was further bolstered by news that the FDA had issued an “emergency use authorization” for the antiviral drug Remdesivir, to treat COVID-19. The drug has shown during trial it can shorten the time period of recovery in some patients. However, poor economic data reports including a Q1 GDP contraction of 4.8% (worst since Q4 2008) and the decline in personal spending to its lowest level since 1959, caused equities to sell off at the end of the week. With expectations that economic data and corporate earnings around the global will reach their nadir during late Q2, global risk assets may experience some downside till we are able to refocus on the expected sharp turnaround in growth in 2H 2020.
As we enter next week’s trading sessions, global markets will be contending with the expected release of negative economic data, corporate earnings and the potential for the reigniting of a US/China trade war. Economic data will be centered around US Jobless Claims and Non-farm payroll reports. On the earnings front, we see earnings from Berkshire Hathaway, Disney, CVS Heath and General Motors. Thus far with 55% of S&P 500 companies having reported, the blending earnings for Q1 has declined by 13.7%, the largest quarterly profit drop since Q3 2009. From a geo-political perspective, President Trump last week threatened to impose new tariffs on imports from China due to the COVID-19 pandemic.
In turning to next week’s economic calendar, the key data releases will be jobs related with Weekly Jobless Claims and US non-farm payroll at week’s end. But, we start off on Tuesday with the ISM nonmanufacturing survey for April, which is expected to fall 6.5 points to 46.0. Several surveys have been deteriorating as economic activity has been depressed due to the spread of COVID-19, and this will follow the decline already seen in March.
Initial jobless claims for the week ending May 2 are projected to come in at 3.8 million. The four-week average through April 25th was 757,000, the highest level seen since the record 5.79 million claims that were filed for the week ending on April 18, 2020.
On Friday we will get the results for April’s nonfarm payroll, which is estimated to have declined by 20 million. The April report will cover the most severe period of job weakness as the strictest social distancing and stay at home measures were put into place during the month. The U-3 unemployment rate is forecast to rise from 4.4% in March to an estimated 15.0% in April, while the participation rate is expected to fall to around 60.0%.
The Week In Review
U.S. Equities
US equity markets posted their best monthly gain in April since 1987 but dropped at the end of the week due to poor Q1 earnings and outlooks from Exxon Mobil and Amazon.
- Dow Jones -0.22%, MTD -2.55%, YTD -16.26 B. S&P 500 -0.19%, MTD -2.80%, YTD -11.83%
- Russell 2000 +2.24%, MTD -3.83%, YTD -24.10%
Drives: I) US equity markets started the month of May on the downside as several major US companies posted Q1 earnings losses and provided negative earnings forecasts. Exxon Mobil declined 7.2% last Friday, as the company suffered its first quarterly loss in 30 years. Amazon missed its earnings and revenue estimates for Q1 and warned profits for Q2 could be 0.0% as costs have risen due to COVID-19 related issues.
II) Real US GDP for Q1 fell at an annual rate of 4.8% which was worse than the consensus estimates of -4.0%. The contraction in production was due to the coronavirus and the stay at home restrictions imposed across the country. Real consumer spending declined at a 7.6% pace, with services spending hit the hardest falling at a record rate of 10.2%. The one positive in the report was the 6.9% increase in spending at grocery stores.
III) The Personal Consumption Expenditure report showed how depressed consumer spending has been due to COVID-19. Consumer Spending is estimated to have plunged by 7.3% while nominal spending fell 7.5%. Personal income was also depressed by the coronavirus disruptions as it dropped by 2.0% in March. Due to job and earnings uncertainty, the savings rate jumped from 8% in February to 13.1% in March, the highest since 1980.
IV) In March, pending home sales slumped by 20.8% which exceeded the disappointing expectation of a large drop in sales during the month. The enormous decline in sales took the index down to its worst level since September 2011. Pending home sales typically lead existing home sales by one to two months, thus existing home sales will likely see a sharp drop in early Q2.
V) Equities Month to Date are lower with Large-Cap, Growth, Consumer Staples and Com. Services leading equity price performance. The laggards for the period are Small-Cap, Value, Energy and Con. Discretionary.
Capitalization: Large Caps -2.86% (YTD -12.27%), Mid-Caps -3.31%(YTD -19.21) and Small Caps -3.83% (YTD -24.10). Style: Value –3.96% (YTD -29.60%) and Growth -3.26% (YTD -18.79%). Industry Groups: Technology -2.90% (YTD -2.68%), Healthcare -2.07% (YTD -3.65), Information Technology-2.97 (YTD-3.94%), Consumer Staples -1.23% (YTD -8.03%), Communication Services -1.62% (YTD -8.60%), Consumer Discretionary -3.83% (YTD -10.12%), Utilities -2.43% (YTD -12.77%), REITs -3.24%(YTD -14.42%), Materials -2.16%(YTD -16.80%), Industrials -2.98% (YTD -22.97%), Financials -3.27% (YTD -27.76%) and Energy -5.95% (YTD -39.08%).
European Equities
The MSCI Europe Index was higher last week by +4.13% as Italy, Spain and France announced measures to scale back social restrictions and on hopes the economic decline can be contained in 2H 2020.
Drivers: I) Euro-zone GDP slide by 14.4% quarter over quarter on a seasonally adjusted annual basis, in line with the consensus estimate of a 15.0% decline caused by the COVID-19 pandemic. The drop in GDP shows that economic activity was running approximately 33.0% below the pre-coronavirus lockdown level of activity. Economists are projecting a bottom of activity in April, implying a 45.0% drop in Q2 2020 GDP.
II) The Euro-zone unemployment rate increased by a modest 0.1% to 7.4% in March. The number of unemployed increased by 197,000, held down by a surprising drop of 267,000 unemployed workers in Italy. The unemployment rate is being helped by a record use of short time work subsidies. For example, the shadow unemployment rate in Germany which includes an estimate of short time work, would have rose to 16.0% in April, while the national unemployment rate increased by only 0.2%.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +4.13% for the week (MTD -0.41% YTD -20.17%).
Asian Equities
Asian equity markets rallied last week, as the experimental drug Remdesivir proved effective against the coronavirus in a study being conducted by the US National Institutes of Health. Dow Jones Asia Index was higher by +3.26% for the week, (MTD -1.80%, YTD -14.92%).
Drivers: I) China’s Manufacturing Purchasing Managers Index declined by 1.2 points in April to 50.8, following the 16.3 point rebound seen in March. Performance for the month was mixed across the primary components with a slight decline in output to a solid level (down 0.4 points) and a significant drop in new orders (down 1.8 points).Export orders plunged by 12.5 points as the spread of the coronavirus stifled export demand.
II) Japan’s consumer sentiment plunged a record 9.30 points in April down to 22.6, the lowest reading on record since the survey began in June 1982. The drop-in sentiment followed the 7.4-point drop in March. The index had previously bottomed out in October 2019 when the consumption tax rate hike took place. The four major components of the index dropped dramatically, but the decline in labor by 12.9 points was the worst.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +1.86 (MTD -2.84%, YTD -16.23%), the Hang Seng Index was higher by +2.78% (MTD +0.00%, YTD -12.58%) and the Shanghai Composite advanced by +1.84% (MTD +0.00%, YTD -6.23%).
Fixed Income
Treasury yields were slightly higher last week as market participants digested the news that jobless claims rose by another 3.8 million and consumer spending dropped by 7.5% in March.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.615% up from 0.605%. The 30-year yield rose last week finishing at 1.250% up from 1.176%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.12% last week, MTD -0.12% and YTD +4.86%. The Bloomberg Barclays US MBS TR was higher by +0.32% last week, MTD +0.00% and YTD +3.47%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.66% for the week, MTD -0.18% and YTD -8.92%.
Commodities
The DJ Commodity Index was lower last week by -1.70% and is down month to date -0.48% (YTD -32.53%). The commodity index fell last week as demand for industrial metals and agricultural products continue to wane due to the coronavirus lock-down.
Performance: I) The price of oil increased last week by +14.61% to close at $19.69 and is higher month to date by +4.51% (YTD -67.75%). Oil prices firmed last week as major oil companies announced voluntary crude production cuts and amid signs available storage capacity may be available for longer than expected.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was down by -1.60 ending at 100.29 for the week (MTD -0.34%, YTD +2.37%). The USD declined last week as the release of worsening economic data in the US, including multi-year lows in GDP growth and personal spending, dulled demand for the USD.
III) Gold fell last week as investors weighted the potential efficacy of coronavirus treatments presently being tested versus a restart of the global economy. Gold was lower by -2.03% last week, dropping to $1710.2 (MTD +0.95%, YTD +12.28%).
Hedge Funds
Hedge fund returns in April were 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 +2.88% MTD and down -4.17% YTD.
- Equity Hedge has advanced by +4.49% MTD and lower by -9.44% YTD.
- Event Driven is up MTD +2.73% and is down YTD -2.93%.
- Macro/CTA has risen by +0.49% MTD and is down -0.70% YTD.
- Relative Value Arbitrage has climbed up by +3.00% and is lower -2.60% YTD.
- Multi-Strategy is up MTD at +2.76% and has dropped by -2.81.
Data Source: Haver Economics
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