In lieu of our usual Weekly Bulletin, we are publishing special reports to discuss the market reaction to evolving news on the coronavirus outbreak. We would stress the following observations as developments continue to unfold.
Stocks continue to look to a brighter future. Despite terrible economic and earnings news last week, the S&P 500 Index was up 3.5%. Stocks are an important leading indicator and the strong rally off the March low signals a better economy in the coming
months. There are several major reasons to expect improvements in the coming months.
Potential turning point in economic readings
We expect April will mark the low in economic data and the second quarter will mark
the low for corporate profits – and we are seeing green shoots that signal better times ahead. There are now 29 states that have reopened. While they are opening slowly, this process will continue to incrementally help boost growth at least
into June, and most likely through the summer. Most states will probably be largely open (with a patchwork of mask and distancing restrictions) by the third quarter. Importantly, green shoots are appearing as the economy opens as evidenced by improvements
in auto sales and positive comments from corporate America – as stores and factories reopen (more on reopening below).
Massive monetary and fiscal stimulus
This crisis has been met with an unprecedented
policy response. The Federal Reserve has lowered interest rates to zero and is aggressively buying bonds to ensure the smooth functioning of credit markets – this includes the purchase of corporate bonds for the first time. This massive liquidity
injection has been a major support for financial markets. Monetary policy starts in financial markets then works into the real economy.
The fiscal stimulus is also unprecedented with over $3 trillion (15% of GDP) being injected into the economy with money given to individuals, and small and large businesses. With states just starting to reopen, the impact on the economy of this massive stimulus has been muted so far. However, as the reopenings roll out, the stimulus will help fuel growth - from housing to autos to retail sales to manufacturing.
What to look for in a successful reopening
The path of the virus is obviously the most critical element of a successful reopening. While the path is
highly uncertain, we are watching developments in China, Europe and states that are reopening first for direction on economic improvement and the potential for resurgence in the outbreak.
We are also watching consumer confidence readings and credit conditions (bank lending and corporate bond yields) which are showing signs of improvement. Rail shipments, auto sales, and mortgage applications are all high frequency data points that are showing improvement. While Friday’s labor market report was extremely weak, jobless claims are now falling and we are watching this timely indicator for signs of potential labor market stabilization.
China’s green shoots
China’s economy was first
in the crisis, and is now the first out. They have been applying significant amounts of monetary and fiscal stimulus that suggests a sustainable recovery will take place. We are seeing signs that this is occurring. Chinese auto sales are one sign
of improvement with Volkswagen stating that they are seeing a V-shaped recovery. Chinese authorities are also indicating that they will apply additional stimulus as needed to ensure a recovery.
Earnings season provides guideposts
We now have first-quarter earnings reports from about 90% of the S&P 500 and the results show the technology, health care, and consumer staples sectors posting positive earnings. In contrast, the cyclical sectors (including energy, materials, industrials, financials, and consumer discretionary) all posted significantly lower earnings. We continue to expect these trends to persist in the second quarter and beyond, which favors technology, health care, and consumer staple stocks over the more cyclically exposed sectors.