Markets hit directionless volatility as we await the economy reopening
APR. 27, 2020
Equity markets fell for their first week in three as we have entered a period of “directionless volatility.” The S&P 500 IndexTM is virtually unchanged since early April despite a daily trading range that continues to average more than 2%. The 27% bounce in equity prices from the March 23 low has confounded analysts, as the fundamental backdrop does not seem to support the move, and many are skeptical over the sustainability. Volatility is likely to continue until the path towards normalcy becomes clearer.
Economically sensitive sectors, including airlines, casinos and cruise lines spiked on Monday. The initial phase of the recovery is likely to be focused on the hardest hit areas, but the intermediate phase will likely be led by those able to withstand the difficult environment, particularly large, quality companies. Large caps have far lower debt loads than small caps, with net debt to EBITDA at 1.5x, compared with nearly 3.5x for small caps.
The Fed’s aggressive bond buying program is supporting the fixed income market in varying degrees, with commercial paper spreads nearly back to the historic average (47bp vs 40bp average), but high yield spreads and the TED spread still quite elevated. Safer areas of the market have settled while those with risk remain wide. Issuance has seen an impressive recovery, particularly in structured products, despite continued economic headwinds.
Unemployment claims has emerged as the preferred real-time indicator of the economic pain caused by the outbreak, with claims at 4.4m in the most recent week, down from 5.2m in the previous week. Total new claims have exceeded 26m for the past five weeks, and continuing claims spiked to 16m. Some economists are estimating an unemployment rate of 20%, compared with the post-war high of 10.8%. The outlook for first-quarter GDP growth (release set for Wednesday) has substantially declined in recent weeks, with the current consensus of 4.1% compared with the expectation for 1.5% growth as of early March.
There are continued discussions around a potential “phase four” of stimulus relief, with Democrats considering a new round of checks to individuals and direct payments to impacted small businesses. This faces objections from key Republicans, including Senate Majority Leader McConnell, who prefers to wait to avoid unnecessarily adding deficit spending. President Trump signed “phase 3.5” on Friday, adding $320 billion to the Paycheck Protection Program and $100 billion in relief to hospitals and support for testing.
New York announced plans to reopen the economy in phases beginning May 15, following 14 consecutive days of declining hospitalizations. The first phase will include construction and manufacturing sectors. Georgia began to reopen its economy over the weekend. While discussions around reopening the economy are encouraging, the path to normalcy will be windy and likely not without roadblocks.
What to Watch
This week is the busiest of earnings season, led by energy, technology and industrials companies. Economic data include consumer confidence on Tuesday, first-quarter GDP and pending home sales on Wednesday, core PCE deflator, personal income and spending on Thursday and ISM manufacturing on Friday. There is an FOMC meeting on Wednesday.
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