U.S. equities retreated over the course of the week as the S&P ended down ~2%, Dow Jones 2.65%, and the Nasdaq 1.68%. Markets were led lower by defensive sectors with Utilities, Financials, and REITs coming under the most pressure. Unusual suspects such as Energy, Consumer Staples, and Healthcare bucked broader selling pressures to finish positive. Financials lagged due to banks underperforming, while Healthcare was higher after large gains in big pharma. Consumer Staples was buoyed by strength in big box retail, food, and tobacco names. The Energy sector bounced with crude oil as West Texas Intermediate finished up almost 32% on the week after President Trump tweeted on Thursday that Saudi Arabia and Russia could be cutting back approximately 10mbpd in oil production. After the tweet, oil surged to close up 25% on the day while adding another 11.93% in Friday’s session on the back of Saudi Arabia calling for a virtual and urgent OPEC+ meeting which is expected to take place this week. President Putin is said to support the oil production cuts and the Trump administration is said to have discussed a shutdown of oil production in the Gulf of Mexico, as the Coronavirus has reportedly taken off 35mbpd in demand growth. Industrials lagged with airlines, machinery, and building materials among the weaker groups. Treasuries were stronger with the curve once again steepening. The dollar index was up nearly 2.5% over the five days after pulling back slightly from highs set on March 20th. With all of the volatile moves investors have experienced since March 12th, the market was essentially flat as of the close on Friday (+.32%).
Fears about the Coronavirus outbreak in the U.S. were once again the main driver of the risk-off tone last week. Despite the hope originally expressed by President Trump to have the economy reopened around Easter, he announced that the U.S. will extend federal social distancing guidelines until at least April 30th. The administration continues to warn that cases should peak in the U.S. over the next two to three weeks with estimates projecting deaths between 100K and 240K. New York remains the primary hotspot from an outbreak and healthcare systems stress perspective. Not only is the number of active cases an ongoing issue, but another major issue seemed to be the lack of urgency by some states to issue a stay-at-home order allowing the virus to spread unabated.
We continue to receive some clarity with economic numbers being released over the course of the week and they did little to inspire global investors. Non-farm payrolls showed the U.S. economy lost 701K jobs amid virus concerns, ending the streak of 113 consecutive months of payroll gains. Private payrolls also showed a decline of 713K jobs while the weekly unemployment figure skyrocketed to 6.6M, the highest on record. Over the last two weeks, the U.S. economy has lost ~10M jobs, essentially wiping out all of the economy’s job gains since the election in 2016. Additionally, the jobless rate climbed to 4.4%, the highest level since August of 2017. Pending home sales fell month-over-month; however, they exceeded expectations which called for a contraction. U.S. economic figures are expected to get worse in the coming releases in large part due to the timing of the surveys. The figures recently released only capture the earlier part of March, while the future releases will reflect actions taken by companies in the second half of March. On the surface, it appears companies took more drastic cost-cutting measures later in the month as details were being released surrounding the fiscal stimulus bill. Estimates have varied greatly on what the data will look like. However, some of the most extreme predictions call for a 17%-20% unemployment rate, non-farm payrolls shrinking by 20M, and GDP declining by 35% quarter-over-quarter. While we believe the data will get worse before it gets better, we urge investors to remember that markets are forward-looking indicators and have already started to price in some of these scenarios.
With the release of economic data, recession concerns ramped up and remained a headwind throughout the week. Firms have continued to cut their growth estimates for not only Q2 but Q3 as well, and some doubts about a V-shaped recovery have increased. Our trajectory of Coronavirus cases has not followed any of the other major countries experiencing the pandemic, causing some to believe the shutdown may continue for longer than anticipated. Due to delayed peaking of cases in the U.S., more companies have taken various corporate actions including:
- Pulling full-year guidance
- Drawing down credit lines
- Announcing cost cuts/Capex spending
- Issuing layoffs/furloughs
- Suspended dividends as well as buybacks
Goldman Sachs noted that almost 50 U.S. companies have suspended their buyback programs over the last few weeks. They anticipate more will do so if the shutdown continues for much longer than expected.
There continues to be a focus surrounding earning expectations for 2020, which shows analysts may be behind the curve when it comes to revising estimates. Bloomberg consensus shows S&P 500 EPS for 2020 at $152.62 implying a mere .41% growth rate for 2020, versus expectations that some firms believe earnings could fall ~30% on the year. However, there appears to be a meaningful rebound in earnings expectations with 2021 estimates calling for $178.57 and 2022 standing at $200.08—a 31.6% climb from current levels.
Despite the market selloff and negative datapoints, sentiment appears to be shifting ever so slightly. There have been multiple reports discussing the benefits that social distancing is having on flattening the curve. Additionally, White House health advisor Dr. Anthony Fauci said officials are seeing glimmers that efforts to slow the spread of the virus are working. Other positive headlines include:
- New confirmed Coronavirus cases and deaths have begun to level off or fall in several European countries
- China PMIs came in better than expected
- The global policy response theme continued to gain traction as central banks and governments continue to do all they can to stimulate their economies including:
- Australia announced it will spend $60B on wage subsidies
- Singapore eased monetary policy
- China cut its seven-day reverse repo rate and lowered the reserve requirement ratio (RRR) for select banks
- Japan said it will roll out a $550B stimulus package
- South Korea said they will provide emergency cash payments to families
U.S. stock indexes rallied to start the week as S&P, Dow Jones, and Nasdaq all closed up ~7% finishing near their best levels of the session. It’s a short week with markets closed on Friday due to the Good Friday holiday. The S&P posted its best percentage gain since March 24th and closed at its highest levels since March 13th. The Russell 2K, which has lagged other indices all year, outpaced broader market gains and closed up ~8% to start but still remains off 31% this year. Gains were broad based as infection rates and reported deaths have eased in certain hotspots around the world including New York, which reported their first drop in daily deaths as of Monday morning after reporting 630 a day earlier. Towards the end of the day on Monday as the market broke through the 2,641 technical level, there was a jump in the S&P, with ~20pts with shorts scrambling to cover as the Goldman Sachs most crowded short basket closed up 10.4% in comparison to the S&P of 7%. Despite various opinions from experts, there appears to be a more opportunistic tone from the Trump administration saying peak levels could be seen in the next week or so. Others such as JPM have also said they believe that the apex will come sooner than originally thought and there is expected to be significantly less (5-10x) peak hospitalizations than what the government is projecting of 110K.
As mentioned, gains were broad based but markets were led higher by Technology, Utilities, Consumer Discretionary, Materials, and Financials all of which outperformed. The energy sector, which has been widely watched as of late, lagged broader markets but still closed up 5.15% as WTI crude took a breather after OPEC+ said they will meet on Thursday, instead of initial reports that called for a meeting Monday, April 6th. The U.S. Dollar was modestly higher again versus other major currencies as it continued to build on last week’s gains. Treasury markets slipped slightly but remained fairly strong (the 10yr only climbed about 7bps) given aggressive upside move in equities. We have continued to see the VIX selloff, posting losses in five of its last six sessions, even as equities moved in the same direction. Currently, the VIX sits above the Nasdaq 100 VIX (VXN), which is indicative of systematic hedging and usually only seen during times of extreme market stress, occurring in 2007, 2008, 2011 and 2018. As the VIX has continued to normalize, we have also seen what appears to be fatigue or a “new normal” set in while market volumes have been slowly trailing off in comparison to recent weeks. Since February 20th, market volume on average had been just shy of ~15B shares daily. Since the start of April, we are now averaging 12.6B shares daily, which still remains elevated against its yearly average of 7.9B shares daily.
On the numbers front, more than 1.27M people globally have been infected by the Coronavirus. More than 337K of those cases are being reported in the U.S., resulting in more than 10K deaths. While we have not officially turned a corner as the situation is evolving daily, it does appear to be a promising sign that for the time being, new cases and deaths appear to be moderating. With the recent move higher on Monday, we have now cleared two technical hurdles (2,641 the recent highs and 2,648- the 200- week moving average) that we were previously unable to overcome, although we still await confirmation. As we have seen, price action will be dictated more by fundamentals and data surrounding Coronavirus. However, we find it worth noting that on the technical side, this could be just one less hurdle for investors to have to overcome. While a broader re-test of the lows is completely possible, we find it more likely to see a select re-test within various industries and companies.
THIS WEEK INTERNATIONAL
Europe – The Euro STOXX Index was down 2.22% last week, with banks plummeting 13.17%. The EU announced last Thursday a $110 billion job-support program for countries heavily impacted by the Coronavirus.
France reported on Sunday the lowest number of Coronavirus fatalities since last Tuesday. New cases also dropped to a two-week low. According to the French national medical research institute (INSERM), clinical trials of blood transfusions between surviving Coronavirus patients and current patients with severe conditions, started yesterday in hopes to successfully transfer the immunity.
In the European bond market, yield hunters halted the sell-off in the high yield market. Whether high yield will continue to come down remains to be seen.
APAC – The Shanghai Composite Index was down 0.30% last week, dragged by utilities, telecommunication and real estate. The industrial sector was the only one in the green with 0.65% weekly gain amid a higher than expected manufacturing PMI of 50.1. BBC reported that the city of Wuhan is slowly reopening, with some residents being allowed to leave their home for the first time since January 23rd. Some volunteers are currently actively disinfecting public areas in anticipation of increased traffic. The airline industry is facing new restrictions as the country tries to transition from the lockdown to full work resumption. Indeed, the Civil Aviation Administration released a circular that limits international and domestic airlines to one flight per week. Additionally, airlines must not operate at more than 75% capacity. On April 8th, residents on Wuhan will be officially allowed to leave the city. Social distancing and virus containment guidelines will remain in effect nevertheless to reduce the risk of a second wave.
In Japan, the NIKKEI 225 slid 8.09% last week, trimming the 17% rally from the previous week. The Japanese government is reportedly planning to unlock $46 billion for its financial support program targeting companies affected by the pandemic. The Development Bank of Japan will use government funds to process loans to distressed businesses. To help small and medium-sized companies, the government also plans to waive and reduce interest on loans from private institutions.
In South Korea, The KOSPI Index was up 0.45%, lifted by paper and wood up 16.17%, food and beverage up 11.34% and construction up 10.67%. Like China, the country is transitioning from virus mitigation to suppression. Businesses and residents are operating in a hybrid regime blending best practices from life pre-virus and life post-virus. Lauded for its response to the crisis, South Korea has received requests from 121 countries to export Coronavirus testing supplies.
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