Thursday, 2 April 2020

Tuesday saw the end to the first quarter of 2020, ending as the worst on record - which includes the S&P 500 Index’s record sharp 35% peak-to-trough decline.


While equities failed to sustain the three- day rally last week, shares were modestly higher on Monday following the passage of the fiscal stimulus bill and the subsequent signature by President Trump over the weekend. While stocks were lower, some sectors, such as staples, health care and utilities ended the week higher. While the impact of the virus remains the headline story, energy continues to see some of the greatest volatility with related companies posting a 9% positive return on Thursday in hopes of a production cut from OPEC+. From a broad market standpoint, a glimmer of optimism can be seen with the VIX Index falling from record 80s to the 50s as uncertainty remains elevated but heading in a positive direction for investors looking for stability. As the market looks ahead to the impact of the coronavirus on financial statements, first quarter’s earnings growth is anticipated to be -5.2% according to FactSet. Additionally, the second quarter should see the first double digit decline in earnings in a decade. 


The U.S. Treasury curve flattened significantly this week, with the simultaneous actions of yield on the front end rising and those on the long end falling. The yield on the 3-month Treasury bill rose above zero again, closing the week at 0.05%. The yield on the 2-year note fell from 0.29% to 0.23%, and the yield on the benchmark 10-year note fell from 0.84% to 0.60%, reducing the spread to 0.37% from 0.55%. In the credit market, spreads have tightened since the Federal Reserve began implementing purchasing programs to increase liquidity. Municipal bonds continue to have higher than expected spreads, but markets have seen some improvement. 


The Trump administration hopes to boost the economy via the $2.3 billion stimulus package. Most firms still expect significant impacts to GDP, with Goldman Sachs anticipating first quarter GDP to fall 10% and second quarter GDP to slide a whopping 35%, the worst decline in post-WWII history. Eyes are on unemployment claims to gain any indication of the magnitude of the impact the shutdown has on businesses and what broader damage is occurring in the economy. Last week initial unemployment claims came in at roughly 6.6 million, combing for 10 million over the past two weeks – both record numbers. The Institute for Supply Management (ISM) Manufacturing Index for March fell into contraction territory at 49.1 from 50.1, but far better than the expected 44. The ISM chair stated that “the coronavirus pandemic and shocks in global energy markets have impacted all manufacturing sectors,” with Food, Beverage & Tobacco Products leading the sectors and Transportation Equipment and Petroleum & Coal Products being the laggards. WTI crude rallied roughly 22% on Thursday following President Trump’s statement expecting Saudi Arabia and Russia will cut production of crude oil by 10-15 million barrels, closing the week at $24.75. 

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