April 2020 Market Commentary: COVID-19 (Coronavirus) and Anticipating the (Eventual) Recovery

Data Source: Bloomberg

To view the full commentary, click here.

April 2020 Highlights:

  • Global stocks partly recovered from the steep 1st quarter sell-off that saw the S&P 500 enter deep bear market territory for the first time since the 2008 Financial Crisis.  Global markets turned positive in April with MSCI All-Country World Index or ACWI up 10.7% for the month.
  • Once again, the U.S. market led all major regions with the S&P 500 up 12.8% followed by MSCI Asia ex Japan (+9.8%) and MSCI Emerging Markets (+9.2%).  MSCI Europe and MSCI Japan were notable laggards (+5.9% and +5.4% respectively).
  • COVID19 (coronavirus) headlines drove day-to-day volatility as markets swung around perceived medical advances/disappointments and progress (or lack thereof) in addressing the coronavirus pandemic.  Market rallies were more pronounced over headlines surrounding Gilead’s Remdesivir, a promising antibacterial treatment for severe cases requiring hospitalization.
  • The global economy has experienced a significant decline not seen over several decades.  1st and 2nd quarter U.S. GDP, U.S. business activity, and employment conditions are expected to reach historically low/negative levels due to much of the country ‘sheltering in place.’  Bloomberg economic consensus expects a 3.9% drop in 2020 real U.S. Gross Domestic Product (GDP), -5.5% for the European region, and -3.4% for Japan.
  • Up until the last several days of the month, U.S. large caps and growth stocks had significantly outperformed small caps and value, respectively.  But this performance gap narrowed towards the end of April with large caps barely edging small caps and growth marginally outperforming value.
  • Despite the intramonth volatility in the energy markets that saw spot oil prices plunge to negative $37/barrel (yes, negative), the Energy sector surprisingly led all major sectors for the month followed by Consumer Discretionary (primarily online retailers) and Materials (primarily gold miners).  Defensive sectors such as Consumer Staples and Utilities lagged as did Financials, Real Estate, and Industrials.
  • Among factors, Momentum and High Quality outperformed Minimum Volatility, Value and High Dividend.  Momentum and High Quality are increasingly overlapping with one another, reflecting investor preference for premium growth stocks.
  • Fixed income posted another positive month, helped by the recovery in corporate credit and mortgage-backed/asset-backed sectors.  The U.S. Bloomberg/Barclays Aggregate Index returned 1.8% for the month as the 10-Year US Treasury Yield has settled in a 0.60-0.70% range, off the March low of 0.50%.  U.S. High Yield partly recovered from the 1Q20 sell-off, returning 4.5% for the month.
  • The Federal Reserve’s emergency measures (quantitative easing, primary and secondary market backstops, commercial paper and municipal facilities, dollar swap arrangements with an expanded group of foreign central banks) announced in late March helped put a bid underneath risky assets.
  • Commodities were whipsawed as spot oil prices plunged to deep negative territory (down to negative $37/barrel) as futures contract holders taking physical delivery upon the front month settlement faced shortages in storage capacity at the Cushing, OK terminal.  A significant drop in global oil demand due to the coronavirus pandemic had led to a glut in near-term supply as oil producers struggled to find storage capacity.  However, outside of oil markets, other industrial commodities are showing signs of stabilization as worldwide production and mining-related capital expenditures are being slashed in the wake of falling demand.
  • With the rally in U.S. equities, the S&P 500 now trades at a 10-year high of 20.5 times next 12 month’s expected earnings.  The multiple expansion to new 10-year highs is a result of both global equity rallies and declining forward earnings expectations due to the global economic shutdown.
  • Even though investors have largely written off earnings decline for 2020, forward expectations are increasingly building in a sharp recovery in 2021 although many economists don’t expect global economy activity to recover to pre-pandemic levels by then.
  • In anticipating an economic and earnings recovery, investors may be overlooking knock-on risks from the coronavirus such as financial solvency, geopolitical instability (Middle East, China trade), and commercial real estate.

To view the full commentary, click here.

By: Benjamin Lavine