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Volatility continues as states begin to reopen

MAY. 04, 2020


  • Equity markets remain in a period of directionless volatility, with markets ending last week roughly unchanged despite several large daily swings. This week could remain volatile as Warren Buffet said that Berkshire Hathaway sold its entire stake of airlines and has not identified any asset at an attractive price to deploy some of its record $137B in cash balance. April closed with a gain of 13%, the best result since January 1987 and a reversal of the 13% decline from March. We now enter a seasonally weak period with the adage “sell in May and go away,” though little of this year has followed historic patterns.
  • The complexion of the market move in the past month has been decidedly “risk-on,” reflecting the shift in investor sentiment and their willingness to focus on the recovery. Small caps have decidedly outperformed large caps and growth has outperformed value. Leading sectors include consumer discretionary, energy and materials, while consumer staples and utilities lagged. Given the degree of uncertainty remaining, it is likely that the leadership ebbs and flows through the recovery.
  • Treasury yields have stabilized, with little movement since mid-April. Risk metrics in the fixed income space are mixed, with continued improvement in areas of focus for the Fed, including the TED spread and commercial paper spreads, which have returned to historic averages. Other areas remain strained, including the high yield market, emerging market bonds and the riskier tranches of the CMBS market. This shows the power of the Fed to determine winners and losers.


  • States are beginning to reopen, but activity reflects the reality that the road back will be rocky. All eyes this week will be on Friday’s payroll report, with forecasters looking for a decline in payrolls of 22m in April, bringing the unemployment rate to a post-war record of more than 16%, just months after touching a post-war low of 3.5%. Unemployment claims over the past six weeks have been a staggering 30m, or 18% of the working population. Last week’s GDP report showed a decline of 4.8% in the first quarter, with consensus for a 30% decline in the second quarter.
  • Phase four of coronavirus is facing far more partisan conflict than previous stages, as President Trump said he won’t support additional stimulus without a payroll tax cut, which has little support from either side of the aisle. Each side has a “red line” that is rejected by the other, with Republicans requiring liability relief to companies and Democrats demanding $1t in additional aid to state and local governments.
  • Tensions between the U.S. and China remain elevated, as U.S. officials reportedly believe China covered the extent of the outbreak and the degree of contagiousness in order to stock up on supplies. The White House is considering degrees of punishment and is “turbocharging” an initiative to remove global supply chains from China. This would represent a headwind for corporate earnings. The trade deal with China is yielding disappointing results to date, with Beijing missing energy and agricultural purchase commitments.

What to Watch

  • Economic data this week include durable goods Tuesday, PMI data on Wednesday, consumer credit and productivity on Thursday and the always-important payroll report on Friday. Other drivers of market movement will include earnings releases and progress on phase four stimulus discussions.

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  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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