“None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented.”
—Federal Reserve Chairman Jerome Powell, April 2020
The last couple months have provided a stark reminder that—as Fed Chairman Powell recently noted—we don’t necessarily get to pick our challenges, but we can try to rise to the occasion.
We’ve certainly seen plenty of courage in the face of adversity as the novel coronavirus wreaked havoc around the globe. We’ve seen entire countries alter the way they live and work for the greater good, not to mention the heroism of health care and other essential workers.
Amid wild swings in equity markets, it’s also taken some fortitude for investors to look past near-term volatility and stay focused on their long-term financial goals. But April brought some signs that our collective perseverance—both on the investing front and in the battle against the novel coronavirus—is beginning to pay off.
The broad U.S. stock market, as measured by the S&P 500 index, snapped a three-month losing streak in April. Even some of the hardest-hit areas of the market—including U.S. small-capitalization stocks, non-U.S. developed markets and emerging markets—saw positive returns last month. The rally no doubt rewarded many investors who found the wherewithal to look through the market downdraft earlier this year and stay focused on their long-term financial goals.
On the surface, the disconnect between April’s rally and grim news on economic and other fronts may seem odd. But the market, broadly speaking, is a forward-looking indicator. As such, it has already factored in plenty of bad news (with more likely to come) and begun looking towards a gradual recovery, thanks in large part to the federal government’s unprecedented efforts to shepherd the economy through this crisis. To put things in perspective, it can be helpful to think of these federal efforts as a powerful dose of medicine intended to lessen the economic side effects of the coronavirus pandemic.
We’ve also seen glimmers of hope with regard to the coronavirus pandemic in recent weeks. The pace of new infections and fatalities has flattened in some hotspot states, testing shortages are easing and lawmakers have begun mulling plans to loosen containment measures, according to the Goldman Sachs Investment Strategy Group’s Monthly Market Monitor for April.
A greater appetite for risk drove cyclical sectors higher in April. Investors, for instance, returned in larger numbers to the Technology (which has led the broader market higher in recent years) and Consumer Discretionary sectors. But they also gravitated towards cyclical areas of the market that have lagged lately. Energy and Materials, for example, returned nearly 30% and about 15%, respectively, although they remained in negative territory for the year-to-date and trailing 12-month periods.
Interestingly, Energy ended the month in positive territory despite whipsawing oil prices. In mid-April, the price of one oil benchmark fell into negative territory for the first time ever. The historic decline was rooted in quirks in how oil is traded, coupled with an abrupt drop in demand over the last couple months. Major oil producers have reacted swiftly to falling demand by cutting production, and we may see more such moves. But, over time, supply and demand in the oil market should become more balanced as greater numbers of people resume their daily commutes and factory activity and air travel pick up.
The Federal Reserve’s intense efforts to ensure liquidity helped support the bond market in April, which registered a positive return for the month. Longer-dated Treasury bonds performed well, gaining over 2% for the month.
Both investment-grade and high-yield U.S. corporate bonds trended higher throughout much of April amid a greater appetite for risk, gaining 5.2% and 4.5%, respectively.
On the whole, longer-dated, 10- and 20-year Treasurys not only outshined all other corners of the bond market on a year-to-date and trailing, 12-month basis through April, but also outperformed the S&P 500 for the same periods. As we’ve noted before, bonds can help to cushion diversified portfolios during periods of market volatility, a role the asset class played very effectively in the most recent market downturn.
April kicked off what’s widely expected to be another painful quarter for the U.S. economy. This is hardly surprising given that large swaths of the economy, including restaurants and nonessential retail, remained largely shuttered last month, and activity likely softened even in some sectors less directly affected by coronavirus-containment measures.
Jobless claims in the U.S. have topped 30 million in a short period, and some forecasters, including Goldman Sachs Global Investment Research (GIR), expect the unemployment rate to climb as high as 15% later this year. This would be a stunning development considering that at the start of this year unemployment hovered at a 50-year low of 3.5%.
That said, GIR also expected the pandemic to take its biggest monthly toll on the U.S. economy in April—in the form of a 13% hit to gross domestic product (GDP)—with its effects fading gradually afterward. For the full year, GIR expects average annual growth in the U.S. to contract by 5.7% and by 2.7% globally, according to a forecast issued in late April.
As evidenced by last month’s rally, many investors are already looking beyond the second quarter and into the latter half of 2020, and even early 2021, when economic activity is expected to rebound. Optimism surrounding a near-term economic recovery has been fueled by reports of progress in developing coronavirus treatments and vaccines, initial steps to ease containment measures and worldwide efforts by governments to soften the pandemic’s economic blow.
In the U.S. alone, Congress and the White House have already passed a trio of fiscal stimulus measures worth more than $2 trillion, or about 11% of GDP, and are mulling additional actions. In late April, the Federal Reserve, which made two emergency cuts to its benchmark interest rate the prior month, left rates unchanged, noting that it expected to keep rates near zero until it’s confident the economy is back on track. In addition to cutting rates, the central bank has rolled out some 10 separate programs to keep credit flowing into the economy and financial markets running smoothly.
“At the Fed, we are doing all we can to help shepherd the economy through this difficult time,” Chairman Powell said in early April. “When the virus is under control, businesses will reopen, and people will come back to work. There is every reason to believe that the economic rebound, when it comes, can be robust,” he added.
While the market appears to have found a bottom in March, its recent rally may prove fragile, particularly if the pandemic appears to worsen in the U.S. and shelter-in-place policies last longer than is widely assumed. Many investors and U.S. lawmakers believe the worst days of the pandemic are behind us. Time will tell.
As always, if you have any concerns about your portfolio or financial goals, resist the urge to react to the latest headline. Talk to your financial advisor instead. That’s what they’re there for.
Many of us will come out of this trying period having learned new levels of courage, whether in investing or in life. I remind myself of this each morning as my husband and I and our three kids prepare for another day of working and distance learning under the same roof.
Invest well and stay healthy,
Kara Murphy, CFA
Chief Investment Officer
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S&P 500 Index: A broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization.
Russell 2000 Index: This index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks; the index serves as a benchmark for small-cap U.S. stocks.
MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009, the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Bloomberg Barclays U.S. Aggregate Bond Index: This is a market capitalization weighted bond index of investment-grade, USD-denominated fixed-income securities.
U.S. High Yield Corporate: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.
U.S. Investment Grade Corporate: The Bloomberg Barclays U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.
Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated, long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS) to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are considered during the annual review process.
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