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 remained range-bound last week with investors focused on the latest round of fiscal support and the path toward economic normalization, with many states putting in place plans for reopening their economies. While weak economic readings and earnings reports continue to reflect the magnitude of the economic shock, we remain encouraged that the massive policy response will successfully bridge the economy through the crisis.
We continue to see an unprecedented policy response in both magnitude and speed in response to the coronavirus economic shock. On the fiscal front, congressional leaders and White House officials reached an agreement last week for an additional $484 billion of support (2.2% of GDP), including around $320 billion for the small business loan program to support employment (which had already exhausted an initial $350-billion allocation), and $100 billion for health care. Additional fiscal support for state and local governments and infrastructure is being discussed as well.
U.S. monetary and fiscal stimulus is now up to 38% of GDP, and the effects are clear in financial markets. Stocks rebounded off the March 23rd low in historic fashion, corporate bond yields are lower, while corporate lending is growing at a rapid 21% year/year pace. This is a dramatic reversal of the tight financial conditions that existed in March and an encouraging signal that the policy response is having a major impact. Importantly, the effect of monetary stimulus begins in the financial markets and ultimately finds its way into the real economy.
Meanwhile, the incoming economic data continues to show the severity of the economic shock we are experiencing. April was the first full month of the shutdown and last week’s preliminary business surveys showed a historical drop in April’s activity, led by the service economy. We are now in the middle of earnings season with 28% of the S&P 500 Index reporting first-quarter earnings. These early results suggest earnings declined by 16% in the first quarter. With very little visibility in the near term, most firms are withdrawing their earnings guidance for 2020.
We expect earnings visibility to remain poor until the economy opens back up. While this remains dependent on the uncertain path of the virus, we are encouraged by the progress that has been made to contain the virus and the plans that are being made to reopen the economy. Other countries are opening up, and there are already green shoots. China, which was first to enter the crisis, is seeing improvement from business surveys to auto sales. European countries and now U.S. individual states are starting to open up—we are watching them for signs of the economic recovery path that we expect to unfold in the second half of the year.
We continue to advocate a conservative investment approach. Stock market leadership remains with firms that have strong balance sheets and secular growth opportunities. We continue to favor firms with these characteristics—primarily from the defensive Health Care and Consumer Staples sectors and high-quality technology firms. Historically, stock market and economic declines of the current 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.
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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.