05/04/2020
Until now we have had to make do with a somewhat limited view of the economic impact of the coronavirus. First quarter GDP was bad enough at -4.8 percent, but the economy was really only shut down for a couple of weeks in the first quarter. Consumer spending slowed sharply as might be expected, with over 90 percent of the population subject to varying degrees of stay-at-home orders. The new weekly jobless claims reports have provided a close to real-time tally of the devastation in the labor market, but there have been few opportunities to get a full, economy-wide reading of the overall impact. Last Friday, the ISM manufacturing report for April was, not surprisingly, considerably weaker than March, especially the new orders category, and consumer confidence plunged, but responses to both of those surveys are typically collected in the middle of the month. We also learned that vehicle sales fell sharply, although not as much as expected. That partial view is about to change this week and next, as monthly economic data begins to reflect the full impact of the virus. 

Beginning with this Friday’s April employment report, we will begin to get a true, month-long picture of just how economically debilitating the shutdown has been. The unemployment rate is expected to rise to 16 percent, from 4.4 percent in March, and it could turn out to be higher depending on the labor force participation rate. During the following week, we will learn the latest producer and consumer price indices for April, retail sales and industrial production. All are expected to show significant, perhaps disquieting, declines. The next two weeks will also tell us more about the experience of those communities slowly reopening their economies. Questions as to how quickly consumers will re-engage socially, and whether a new frugality will emerge will begin to come into focus, as will the associated risk of an acceleration of infections as social distancing discipline eases. 

Equities Continue to Trade in a Narrow Range; S&P 500 Sees the Best Monthly Gain in 30 Years 

U.S. equities fell for the second straight week, but the slide was a modest 0.2 percent. And for the third straight week, stocks traveled in a fairly narrow range, although volatility remains elevated after rising for the first time in five weeks. The S&P 500® index rose almost 13 percent in April, its best monthly gain in over 30 years. But on Friday, as the new month began, a degree of caution returned after one of the year’s better performers, Amazon (+24 percent year to date) warned of second quarter headwinds and fell 8 percent, and Apple pulled its forward guidance. A reported 160 companies in the S&P 500 have now pulled their guidance. With earnings season now more than half complete, first quarter results are expected to show a year-over-year decline of roughly 14 percent, according to Factset. Second quarter results are expected to be down 37 percent, and the full year is expected to be down 18 percent. The latter two estimates obviously entail significant amounts of guesswork.

Bond Market Volatility Remains Low, Signaling the Desire for Safety 

Whereas equity volatility remains elevated, the same is not true for Treasury bonds, perhaps not surprisingly as the desire for safety remains high. The MOVE index of implied one-month Treasury option volatility has fallen to its lowest level of the past year. During the twelve months through the middle of this past February, the MOVE index averaged a reading of 64. But as the markets started to become unnerved halfway through the month, the index began to surge, peaking at 164 on March 9. Since then, however, the index has receded all the way down to 48, a level last seen in May 2019. On May 6 of last year, the ten-year Treasury note yield stood at 2.47 percent. It closed this past Friday at 0.61 percent. However, since the start of April, the yield has moved little, between a low of 0.57 and a high of 0.77 percent. The two-year note has fluctuated between 0.19 and 0.29 percent, and the thirty-year bond has traveled between a low of 1.16 percent and a high of 1.41.

Important Disclosures:

Sources: Factset, Bloomberg

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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The MOVE Index is essentially the fixed income market's version of the better known Cboe Volatility Index (VIX) for equities. The MOVE Index calculates the future volatility in U.S. Treasury yields implied by current prices of options on Treasuries of various maturities.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Purchasing Manager's Index (PMI) is a monthly report based on a national survey of purchasing managers at more than 300 manufacturing firms that tracks month-over-month changes in new orders, production, employment, supplier delivers and inventories for the manufacturing sector.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.

A 2-year Treasury note is a debt obligation issued by the United States government that matures in 2 years.

Past performance is not a guarantee of future results.

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