• Investors are growing increasingly optimistic over prospects that the coronavirus pandemic is cresting and areas of the global and U.S. economies are starting to re-open.

• Cautious optimism is warranted, but we also expect economic activity to remain depressed and uneven for some time. The good news: Fiscal and monetary stimulus should help set a base for an economic recovery later this year.

• We continue to believe that stocks have already reached the cycle low, but also expect that near-term weakness is likely.

Stocks started the week in a positive direction before dropping sharply on Thursday and Friday. We think this sort of volatility is likely to persist for some time. The S&P 500 Index was down marginally for the week, but more cyclical and smaller cap stocks outperformed, indicating some optimism about the economic future.1 Energy was the best-performing sector as oil prices enjoyed a 17% increase from depressed levels.1

Ten Observations And Themes
1. Equity valuations have climbed higher as volatility remains high. In 23 sessions between February 19 and March 23, U.S. stocks fell 35%.1 In the 24 trading sessions that followed until April 29, stocks rose 35%.1 Price improvements came from a sense that the coronavirus pandemic may be easing, stimulus measures were working and the recession could be short-lived. Corporate earnings expectations have been falling, however, pushing up valuation measures. On February 19, the 12-month forward P/E ratio for the S&P 500 was 19X.1 At the market peak last week, it was up to 20X, its highest level since 2002.1

2. The rough first quarter GDP report will pale in comparison to what we expect to see in the second quarter. Growth fell 4.8% in the first quarter, the first contraction since 2014 and the worst number since 2008.2 We expect second quarter growth will fall by 25% or more.

3. Unemployment continues to soar. On Friday, we’ll see the April labor report, which is based on readings in the middle of the month. We think it will probably show an unemployment level of at least 15%, but factoring in the additional weeks of unemployment claims, we think the actual current rate is around 20% and rising.

4. Technology and less cyclical areas have been weathering the earnings storm relatively better.We’re about two-thirds of the way through first quarter earnings season. Overall revenues are flat and earnings results are down around 15%.3 The financial sector and cyclical areas of the market have been the worst performers.3

5. The coronavirus appears to be cresting in the United States. Investors are becoming increasingly optimistic about plans for re-opening areas of the economy around the country. These signs are encouraging, but we caution that confusion, uncertainty, backtracking and fresh rounds of infections all remain likely.

6. The relationship between the United States and China is worsening. Prospects for a phase-two trade deal seem to be completely off the table, as acrimony and distrust are mounting. Many in Washington are calling for an increased decoupling between the two countries, and we have a sense that China is moving from being a U.S. competitor to an adversary.

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