Americans Brace for a Challenging Two Weeks

Stocks slumped last week as evidence of the economic toll of the coronavirus continued to mount. In the U.S., a staggering 6.6 million new claims for jobless benefits were filed. In addition, the employment report for March showed the first loss of jobs since 2010, despite being representative of only mid-month labor market activity. Also, manufacturing, factory orders, vehicle sales, construction spending and consumer confidence all declined. The S&P 500® index shed 2.1 percent on the week. It was the fifth weekly decline in the past seven since the current selloff began, leaving the index down 23 percent year-to-date and down 27 percent from its February 19 peak. Somewhat encouragingly, expected volatility in the S&P 500 declined sharply. The VIX index fell to a reading of 47 from 66 the prior week, extending a decline that began in mid-March when the index reached 83. Stocks outside of the U.S. fell by 2.9 percent in dollar terms for the week. 

March Employment Report Comments

Job losses were expected to be fairly modest in March because the measurement period for the data was early in the month (with few exceptions, the data is collected each month in the week that contains the 12th). Clearly, job cuts were much worse than perceived in the early days of the coronavirus outbreak. Unemployment claim filings since show that job cuts will get much worse in April, and likely into May at least.

The Story of a Quarter Rocked by a Global Pandemic

The MSCI All Country World index of global equities fell 22 percent in the first quarter. It was the steepest quarterly decline since the end of 2008, in the midst of the financial crisis. The S&P 500® index fell 20 percent, also its worst decline since the end of 2008. The energy sector suffered the sharpest decline, falling 52 percent as the price of WTI crude oil fell 66 percent in the quarter. Financial stocks were a close second, falling 32 percent. The yield on the ten-year U.S. Treasury note fell from 1.92 to 0.67 percent. 

The Peaks and Valleys of a Bear Market: Why Investors Should Focus on the Long Term

Stocks staged a powerful rally last week on hopes that the government’s response to the coronavirus will be enough to keep the economy afloat. The S&P 500® index surged higher by 10.3 percent, including a 3.4 percent decline on Friday, after Washington’s $2 trillion stimulus package, the equivalent of almost 10 percent of 2019 U.S. GDP, came into focus. Coupled with the earlier initiatives of the Federal Reserve to unlock funding markets, investors turned more optimistic that the worst-case scenarios for the economy could be averted. It was just the second positive week for stocks in the past six. The S&P 500 is now 25 percent below its February 19 peak, compared to its lowest point of -34 percent at the close last Monday. 

Will a $2 Trillion Stimulus Package be Enough to Save the Economy?

Reports that Congress was edging closer to an agreement on a $2 trillion economic stimulus package sent stocks soaring on Tuesday this week. The S&P 500® index rose 9.4 percent, while the Dow Jones Industrial Average gained 11.4 percent, its single best day since 1933. Stocks added modestly to those gains on Wednesday. In the past two days, S&P 500 has rallied 11 percent from its low close on Monday, although it remains 27 percent below its February 19 closing high. The Chicago Board Options Exchange (CBOE) VIX index of implied S&P volatility remained elevated. In contrast, implied volatility in the U.S. Treasury market fell for the second straight day this week, and both investment grade and high yield spreads narrowed in response to the announced Fed initiatives and prospects for economic stimulus. Municipal bonds rallied sharply as well. 

The Economic Impact of Coronavirus Remains Uncertain

The selloff in equities accelerated last week. The S&P 500® index fell 15 percent, its worst week since 2008, leaving the index down 32 percent from its February 19 high, and down 29 percent on the year. At the sector level, real estate was far and away the worst performer. Also, notably weak were energy, industrial and financials. All eleven sectors were lower, with the best performer, consumer staples, still falling by 11 percent. For the week, The Chicago Board Options Exchange VIX index averaged 72. Treasury bond yields were lower on the week, as bond market volatility remained elevated.  The ten-year yield fell 11 basis points to 0.85 percent, and the thirty-year bond yield fell 12 to 1.42 percent. High yield credit spreads widened sharply once again, rising 278 basis points to 1009. It was the fifth straight week of wider spreads that have climbed 653 basis points in that time, to their widest since 2009. The municipal bond market also remained under extreme pressure as selling accelerated, particularly at the shorter end of the yield curve. 

Investors Confront the Stark Reality of the Coronavirus

Stocks tumbled into a bear market last week for the first time in eleven years, after a disappointing coronavirus address to the country by the president. But the almost 10 percent decline in the S&P 500® index on Thursday was quickly followed by a better than 9 percent gain after the president declared a national emergency on Friday. As the week ended, the index was 19.9 percent below its February peak, but the technical definition of a bear market had been met. According to Ned Davis Research, the mean decline among bear markets without recessions over the past 100 years plus is -25 percent, and takes 40 weeks to recover. If accompanied by a recession, the median decline is 35 percent and takes 74 weeks to recover. The week’s volatility was extreme, as the VIX Chicago Board Options Exchange index averaged 55, including a brief move above 75, compared to its ten-year weekly average of 17. The daily price change of the index last week included moves of 8, 5, 5, 10 and 9 percent. 

Oil Price War Creating More Questions for Investors

The failure of Saudi Arabia and Russia to agree on an oil production cut extension, and subsequent indications of an all-out oil price war, has sent global stock markets and bond yields sharply lower overnight. The Eurostoxx 600 index is trading down 6 percent, with the energy sector dropping 14 percent. This is, of course, on top of the declines experienced over the previous several weeks, bringing the total decline in European equities to a bear market 20.7 percent. This follows overnight declines in Asia ranging from 3 percent in China to 8 percent in Thailand. Futures in the U.S. are trading down almost 5 percent. The price of West Texas Intermediate crude oil is down $9 a barrel overnight, or 22 percent. This is on top of a $4.60 a barrel, or 10 percent decline on Friday. Bond yields are continuing to fall, as the ongoing flight to safety has gathered strength, pushing the ten-year Treasury yield to 0.40 percent and the thirty year to 0.82 percent.