04/30/2020
First-quarter GDP fell by an estimated annualized rate of 4.8 percent. That was higher than the 4.0 percent consensus forecast, as personal consumption fell more than expected. Notable declines came in healthcare services, as consumers stayed away from facilities dealing with the virus outbreak. Not surprisingly, food and recreation service consumption declined sharply. Among goods consumption, motor vehicle sales were notably weak, but offset by a rise in grocery and household goods purchases. It was the weakest quarterly result since the fourth quarter of 2008 when activity fell 8.4 percent. With only a couple of weeks of virus mitigation impact during the quarter, the implications for the second quarter are ominous.

After a modest 1.2 percent decline last week, stocks are higher by 3.6 percent through the first three days this week. Investors understand that the economic data is going to be weak and are so far looking through it. And despite the seemingly universal reticence of the healthcare community, tentative steps to reopen the economy in a handful of states is being viewed optimistically. And the best performing sectors this week are the cyclical laggards. Energy is higher by 12.2 percent, financials by 7.5, and materials by 7.2 percent.

Adding to the rising optimism was a report of positive results from a trial of Gilead’s Remdesivir drug in COVID-19 patients. The S&P 500 reached its highest level since March 6 yesterday, leaving it lower on the year by 9.0 percent. It is still 13 percent below its February 19 peak, but from the low on March 23 it has rallied by 31.4 percent. At the same time, the VIX index of implied volatility continues to fall. It closed on Wednesday of this week at 31, its lowest level since late February.

High Yield Credit Spreads Show Signs of Increasing Optimism

In further evidence of rising optimism, high yield credit spreads have narrowed modestly this week, down 16 basis points to 787, using the ICE Bank of America High Yield index. That still leaves the spread considerably wider than the 357-basis points level at the February peak in equities. But the spread is also now appreciably narrower than 1087 at the March 23 low in stocks. Most of the narrowing has occurred as a result of a decline in high yield rates, as the Treasury market has barely moved. The yield to maturity on the high yield index has fallen almost 300 basis points from 11.41 percent on March 23 to 8.46 at yesterday’s close. The yield on the ten-year Treasury note has declined from 0.79 percent on March 23 to just 0.63 percent at yesterday’s close and has hardly budged in the past two weeks.

The Fatigue of Those Practicing Social Distancing Grows; Easing Restrictions Will be Watched Carefully

The Social Distancing Index maintained by the University of Maryland, based on cellphone tracking of the movement of millions of Americans, shows more people are on the move. Based on a scale of 0-100, with the higher number representing complete compliance with social distancing practices despite differences at the state level, the index has declined in each of the two weeks ended April 24. The index had seen a steady rise between March 13 as the virus began to intensify, and April 14, from 14 to 51 percent compliance. But it has since declined to 44, as some states have loosened restrictions, warmer weather is arriving, people want to get back to work, and some others are no doubt simply tired of being restricted to home.

The states with the biggest declines over the past two weeks include Louisiana -15 to 35, Ohio -13 to 37, and Indiana -12 to 32. At the opposite end of the spectrum are Wyoming + 3 to 23, and no change in Rhode Island at 54, and Massachusetts at 60, the latter two of which continue to be seriously impacted by the virus. The degree of compliance ranges from a high of 69 in Washington D.C. and 65 in New York and New Jersey to a low of 23 in far less densely populated Wyoming, and 24 in Montana. Healthcare professionals continue to advise that social distancing practices be maintained at the risk of a resurgence in infections. How that evolves in states that are now in the process of easing restrictions will be watched carefully.

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This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.

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 S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Financial Select Sector Index measures the performance of financial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Materials Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) materials sector.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

Bank of America/Merrill Lynch High Yield Master II is an index of high-yield corporate bonds which measures the broad high yield market.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

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.

Past performance is not a guarantee of future results.

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