Given the pace at which the global economic environment is changing as a result of the spread of COVID-19, we’ve found there is an increased interest in up-to-date insight on the economy and the markets. With volumes of information out there, we aim to cut through the clutter by summarizing the week’s events by producing this brief written by Chief Investment Officer, Rob Edel, published every week.
Markets were mainly weaker last week, though selling appeared more orderly. The S&P 500 fell 2.1%, while small-cap stocks (Russell 2000) dropped just over 7%. Volatility, however, continued to move lower (though well above the historical average) and average trading volume in the stocks moving higher increasingly exceeded volume of stocks moving lower as the week progressed (Arms or Trin Index moved lower). Selling was less indiscriminate, with traders differentiating between winners and losers. In Canada, the S&P/TSX actually gained 2%, led by a rally in oil and gold.
WTI crude gained over 30%, or $6.80 a barrel, while Western Canadian Select increased 136%, or $6.90 a barrel, though this was off a historically low base ($5.06 US a barrel!). The rally in oil was based on hopes OPEC+ would reach an agreement to cut production, with a virtual meeting scheduled for Monday. Frictions between Saudi Arabia and Russia re-surfaced over the weekend, however, and the meeting has been delayed to later in the week (April 9th). As for Gold, bullion was relatively unchanged, falling a little over $7 an ounce for the week.
The fixed income markets were also relatively quiet, with two-year and ten-year Government of Canada Bond yields both falling three basis points, and two-year and ten-year US Treasury yields dropping one and eight basis points respectively. Credit markets were a little more mixed, with the iShares iBoxx Investment Grade ETF falling just over 1% and the High Yield Corporate Bond ETF dropping 4.5%. The divergence between these two credit markets can be expected given the Federal Reserve’s support in the investment-grade market. Going forward, we would expect investment-grade spreads to normalize faster than high yield. Overall, we saw both positives and negatives in market action last week; which makes sense given news regarding the economy, monetary & fiscal policy, and the Coronavirus.
In regards to the economy, economic releases continue to surprise to the downside. The US jobs report, released at the end of the week, saw a decline of 701,000 net jobs in March with the unemployment rate rising from 3.5% to 4.4%. Many believe the unemployment rate could peak at 10% or higher (Goldman Sachs sees 15% as the high and Morgan Stanley 15.7%). The St. Louis Fed believes the unemployment rate could touch 32% over the next couple of months, depending on the extent of the lockdowns. Over the past two weeks, roughly 10 million Americas have lost their jobs, wiping out all the gains since President Trump was elected in November 2016. Forecasts for economic growth continue to move lower, with Goldman Sachs lowering their Q2 GDP forecast to -34% from -24%, but still believing in a Q3 recovery, with GDP +19%. Others are losing faith in the so-called V-shaped recovery and believe a U-shaped trajectory is more likely. Moody’s Analytics’ Mark Zandi describes his forecast more like a “Nike Swoosh” shaped recovery, expecting -25% in Q2 and +15% in Q3. On the positive side, China’s economy looks to be ramping back up after virtually shutting down during its outbreak, though the speed of the recovery may be slower than hoped.
In line with worsening economic projections appear to be the willingness of policymakers to do whatever it takes to get the economy through what is evolving into what the UN Secretary General has referred to as the biggest challenge for the world since WWII. Mere days after passing a $2 trillion aid package, it’s third legislative package dealing with the Coronavirus, a fourth bill is already being discussed and is said to be targeted at stimulating the economy rather than just providing relief. Canada has been equally proactive, increasing wage subsidies to 75% from 10%, amongst other measures. Canada has been more aggressive than the US in declaring social distancing rules and thus can expect even greater job losses in the short term. In combination with dangerously high consumer debt, this makes Canadians particularly vulnerable.
News on the Virus itself last week revolved around progress being made globally on “flattening the curve”. China continues to report success in containing the outbreak and has started to re-open Wuhan and Hubei provinces, the original epicenter of the outbreak. News from Europe is more mixed, with the growth rate of new cases in hard-hit Italy and Spain continuing to slow, but new cases and deaths increasing none the less. It is expected Europe could see a peak by mid-April.
Reports from the US are bleaker, as new case growth continues to be in the double digits and hot spots like New York reach their limits in terms of their ability to handle the health disaster. Last week the White House released projections that between 100,000 to 240,000 Americans could lose their lives, even with current mitigation measures. If the US had not enacted social distancing and other stay at home orders, the White House believes 1.5 million to 2.2 million Americans could have died.
Americans and Canadian are coming to the realization the current mitigation measures will have to last longer than they initially thought, possibly until July in some regions. This is not priced into the market. Also not discounted into the market is an understanding of what life will be like once current measures are relaxed. It is unlikely life will return to pre-virus norms in the next 12 to 18 months, until a vaccine hopefully becomes widely available. We expect different treatment options will become available to help shorten hospital stays and reduce fatality rates, but some restrictions and extensive testing will still be needed to ensure a second or even third wave doesn’t require future shutdowns.
On the treatment front, the FDA granted emergency approved malaria drug Hydroxychlorinequine, and early French and Chinese trial results have shown the treatment has some benefits. These trials are very small however, and despite President Trump’s enthusiasm for the drug, anecdotal reviews of its efficacy are less than encouraging. Anti-viral Remdesivir (an Ebola treatment developed by Gilead) is more encouraging, though it may only be effective if administered early. Some Remdesivir trial results should become available in mid-April. Last week probably the biggest news on the medical front was a new diagnostic test from Abbott Labs was given emergency authorization by the FDA. The point-of-care test can provide results in 15 minutes. It’s not a cure but could play a vital role in helping get Canada and America get back to work by determining who needs to be quarantined and who is free to re-join the workforce.
We suspect economic forecasts will continue to reflect a slower recovery and markets to react accordingly. A recent RBC Institutional Investor poll found 57% believe the market has yet to reach a bottom. Economic releases will continue to be shockingly bad, but the markets will look past them if there is hope of a recovery in Q3. The duration of the current shutdown is the key variable currently being discounted by the market, but we believe the nature and speed of how containment measures will be removed are only now starting to be discounted. The uncertainty, in regards to both duration and speed of recovery (when it begins), make it very hard for traders to take a definitive view. Caution is still warranted.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. All values sourced through Bloomberg.