Highlights
• Economic data continues to break negative records, but we think April will mark the low point for this recession.
• Upside and downside risks for stocks appear fairly well balanced. Over the short term, we think the negatives could win out, meaning that equity prices could be vulnerable to additional downside action.
• But over the long term, we expect markets will experience more solid footing once investors see more clarity about the state of the economy.
Stocks sank last week amid some horrific retail sales data and Federal Reserve Chair Jerome Powell’s downbeat economic assessment. Investors may have been ready to lock in some recent gains, suspecting that equity prices may have risen too fast since their late-March low. Energy stocks fared the worst following a multi-week rally, and REITs and industrials also suffered. Only health care finished in positive territory.1
10 Observations And Themes
1. The Fed provided a dire forecast for the economy, indicating monetary policy will remain very easy for some time. In particular, Chairman Powell noted, “The path ahead is both highly uncertain and subject to significant downside risks.” He also highlighted the ways a deep and long recession could harm long-term growth considerably even after the actual recession ends.
2. We do not expect to see negative interest rates in the U.S. Chairman Powell said as much last week. The Fed will engage in continued quantitative easing, buying more corporate bonds to narrow credit spreads and increase market liquidity.
3. The coronavirus pandemic is disproportionately affecting those of retirement age, which could influence how parts of the economy are re-opened. According to the CDC, the average age of those who have died is 76, with 80% of all deaths in America coming from those over 65.
4. Even if infections rise, it will be politically very difficult to “re-lock down” the economy. The original case for economic closing was not to wait for the virus to be eradicated, but rather to slow down the pressure on the health care system and buy time to develop more testing and treatment. Americans seem increasingly determined to re-open the economy.
5. We continue to think April will mark the low point for the recession. Retail sales collapsed a record 16.4% last month, with only online retails avoiding the pain.2 We expect to see economic data start to improve in May as parts of the economy begin to re-open.
6. Credit markets remain stressed, but are improving. Since the Fed announced support for credit markets in late March, absolute yields have declined and credit spreads have narrowed. Spreads still remain wide by historic standards, but conditions are slowly getting better.1
7. The next fiscal stimulus package is likely weeks or months away. The $3 trillion package passed by the House has virtually no chance of passing in the Senate, although there is a consensus in Washington that more stimulus is needed. We expect a final package in the neighborhood of $1 trillion that could include state and local government support, additional health care funding, some business liability protections, additional unemployment insurance and possibly additional direct payments to individuals.
8. U.S./China relations will likely continue worsening in advance of the November elections. The follow-through on the Phase-One trade deal seems in jeopardy, and U.S. animosity toward China is growing as politicians on both sides of the aisle are blaming China for an insufficient response to the virus.