We experienced the other side of volatility last week, following the worst week since the financial crisis with the best week. Investors crave a period of calm following a period of unparalleled volatility. The S&P 500’s streak of 14-straight days with an intraday move greater than 4% was broken on Friday. Volatility will likely remain elevated until greater clarity emerges, even if the reality is challenging.
Last week’s double-digit gain for markets was a welcome relief rally, though market bottoms are rarely as clean as this one has been. In 2000/01, there were four rallies of greater than 20% before ultimately reaching a bottom, and in the financial crisis, the S&P 500 had a false breakout of 27% before hitting a bottom.
Markets will need to reflect more traditional interactions before confidence in a bottom can be reached. Increasingly over the past month, as expected, defensive sectors (utilities, consumer staples and health care) have led, while cyclicals (energy, industrials and financials) have lagged. Gold prices have gained, while energy and building materials have collapsed.
President Trump has extended the social distancing guidelines until April 30 on the advice of his health experts, after previously stating a goal to open parts of the economy by April 12. Beyond the health implications, the risk in opening the economy and having a spike in cases causing measures needing to come back would be devastating to the economy. He noted that the peak in the death rate is expected to hit in two weeks, and he predicts the economy will be on its way to recovery by June 1. Dr. Anthony Fauci said that projections show that the disease could kill between 100,000 and 200,000 Americans (currently 2,500) with millions infected.
With the ink barely dry on the $2.2 trillion “phase 3” stimulus, lawmakers are already beginning discussions on “phase 4,” with Senate Minority Leader Schumer noting, “This is certainly not the end of our work here in Congress, rather the end of the beginning.” Topics being discussed include extending benefits, plugging holes in the previous bill and supporting state and local budgets. Restricted travel for Congressional members and creeping election politics may complicate a deal
Following a strong week in the market, most equity risk indicators have moderated substantially since the recent peak, led by Global Fear & Greed, VIX and put/call ratio. Fixed income risk indicators are more mixed, with improving High Yield spreads offset by continued widening of Commercial Paper and the TED spread. The Fed’s “bazooka” had an initial calming effect, but that has not sustained.
Economic data is just beginning to reflect the damage from the shutdown, highlighted by 3.3m unemployment claims reported last week, more than 5x the previous record and likely understated by the reporting challenges. Deutsche Bank’s index of early U.S. economic indicators is 12 standard deviations worse than average, which is well beyond a “black swan” event.
What to watch
Economic data releases will increasingly reflect the impact from the shutdown, though several reports for this week reflect February data. We get pending home sales on Monday, consumer confidence on Tuesday, PMI manufacturing and construction on Wednesday, durable goods on Thursday, and PMI services and the monthly payroll report on Friday.
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