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 and many other risk assets continue to stabilize in response to the massive policy support put in place by central bankers and elected government officials. The rapid and decisive action by the Federal Reserve has reduced financial market stresses that developed as a result of the crisis. These reduced stresses can be seen in lower corporate bond yields, and lower mortgage rates that are now back down to their pre-crisis level.

We are also seeing a significant expansion of the money supply which is important in reducing financial stresses. Indeed, this is showing up in rapid commercial and industrial loan growth that is now occurring. All of this signals that the policy response is having a positive impact on the crisis. The impact of monetary policy begins in the financial markets and ultimately finds its way into the real economy.

In terms of the real economy, the incoming economic data remains very weak. This is evidenced by the abysmal readings last week on retail sales, industrial production, and jobless claims. We expect April’s economic readings to remain very weak and only anticipate improvement once the economy opens back up. China and Europe entered the crisis before the U.S. and we are watching them closely for the potential recovery path. This remains dependent on the uncertain path of the virus.

The good news is that May should mark a turn given that COVID-19 infection curves have flattened enough to allow governments in some countries to announce schedules for partial re-openings—from April in Spain and Germany, to May in France. China has reopened and we are encouraged by early signs of improvement there.

While the U.S. schedule remains unclear, the virus containment efforts are showing success. Encouragingly, 21 states are set to end stay-at-home orders in late April. These states represent almost 50% of U.S. economic activity. Other states will most likely follow in May. While social distancing and other containment methods will remain with us, we expect an economic recovery to take place in the back half of this year.

In addition to the Federal Reserve’s efforts, the recovery will be supported by the unprecedented fiscal stimulus that continues to be announced. We expect another announcement this week on additional small business lending support after the $350-billion program was exhausted. The government has signaled a full commitment to provide the necessary support to bridge the economy toward an eventual recovery.

While we are encouraged by all of these recent developments, we think it is too early for an aggressive investment posture. Historically, stock market and economic declines of this magnitude have taken time to process. Buying in incremental amounts through rebalancing from bonds or committing sidelined cash over the next few months represents a prudent investment approach. Market leadership continues to come from the defensive health care and consumer staples sectors and high quality technology firms. We continue to favor them.

Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

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