Conway’s QuickTake: Week of April 20, 2020
Here’s What Happened Last Week:
U.S. Equities rose over the week with the S&P 500 Index ending the period up just over 3%. Remarkably, the S&P is now up nearly 30% from the low reached on March 23rd, bringing the year-to-date decline to 10.5%. This compares to a year-to-date decline of over 30% through the low. Despite the impressive rebound, many are questioning if the rally in risk-assets accurately reflects the underlying deteriorating economic and corporate fundamentals. There was an unusually high level of dispersion amongst the underlying sectors last week, with a nearly 12% difference between the best performing (consumer discretionary: +7.9%) and worst performing (financials: -4.0%). Other notable outperforming sectors included healthcare (+6.2%) and IT (+4.8%) while laggards included real estate (-2.7%) and materials (-2.1%). As measured by the respective Russell indices, growth exceeded value while large-cap exceed small-cap. Similar trends have persisted so far this year.
A slowing of coronavirus infection rates and hospitalizations in some of the hardest-hit domestic areas have helped improved sentiment as did talk of gradually reopening the economy. Despite rising sentiment, much of the economic and corporate data has been disappointing. According to a FactSet poll, analysts expect overall S&P 500 earnings to decline just under 15%. Financial institutions appear to be in a tight spot as several major banks saw first-quarter profits fall well over 50% due to compressed net interest margins (NIMs) and higher expected default rates. Outside of corporate earnings, retail sales fell 8.7% in March, the biggest decline on record and worse than most estimates. Beneath the surface, the fall in sales is a concern for discretionary parts of the economy, such as apparel. Another 5.2 million Americans filed for unemployment last week, bringing the total over the last four weeks to over 22 million.
International Equities were positive but generally lagged domestic counterparties. Within non-U.S. markets, the MSCI Emerging Markets Index exceeded the developed markets, MSCI EAFE Index by a small margin. Most non-U.S. markets also lagged U.S. indices so far in 2020.
In Europe, some countries are extending lockdowns while others are debating if now is the time to reopen. For instance, France expects to reopen schools on May 11th while the U.K. lockdown is expected to last at least another several weeks. Elsewhere in Europe, stimulus plans have been enacted that are similar to U.S. measures. Notably, the Eurozone agreed on a loan-based rescue deal of 500 billion Euros to support businesses. The European Central Bank also remains committed to supporting a recovery. In Asia, the biggest surprise came as China’s first quarter GDP realized a decline of 6.8%, its first on record. Other economic data coming out of both developed and emerging Asia was largely within or below expectations.
Credit Markets rose as yields fell modestly while most credit spreads tightened. Yields backed up on the heels of disappointing economic data. It appears demand for core areas of the bond market, such as municipals, improved as a large general obligation offering by California was upsized and repriced at lower yields. The investment grade market also saw increased demand, particularly from overseas buyers amidst a backdrop of low yields.
Tuesday, April 21, 2020
•Great Britain – Unemployment Claimant Count Change (March)
•Germany – ZEW Economic Sentiment Index (April)
•US – Existing Home Sales (March)
Thursday, April 23, 2020
•US – Unemployment numbers, New Home Sales, Markit PMI results (April)
•Germany – Consumer Confidence
•Japan – Inflation Rate figures (March)
Friday, April 24, 2020
•US – Durable Goods Orders (March)
•Germany – Ifo Business Climate (April)
Resource of the Week:
For those that need a break from coronavirus news, this episode of How I Built This sits down with the founders of the salad chain – Sweetgreen. Sweetgreen founders Nicolas Jammet and Jonathan Neman met at Georgetown University in 2003 and quickly bonded over their frustration at the lack of healthy food on campus. Despite a rocky start, the brand has quickly grown to have over 100 locations in the northeast and mid-Atlantic and has some the most impressive ordering technology and infrastructure in the industry.
Sources: Trading Economics, The WSJ, T. Rowe Price Global Markets Weekly Update, Reuters
Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.