Please note: This update was prepared on Friday, May 1, 2020, before the market’s close.
The logic doesn’t seem to square: More than 30 million Americans applied for unemployment benefits over the last six weeks, while the S&P 500 and Dow Jones Industrial Average ended April with their best monthly percentage gains since January 1987, up 13% and 11%, respectively.
The disconnect between the dismal economic and earnings data and the market’s rally is as wide as we’ve seen in our more than 25 years in the investment business. The full economic and human toll of the coronavirus and actions taken to combat it won’t be known for some time, but the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market is forward-looking, and last month, traders were quick to embrace hopeful signs.
Despite April’s strong rebound, through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 14.1% and 9.3% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 17.8%. As of Thursday, the yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index had dipped to 1.31%, down from 1.40% last week. On a total return basis, the U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has gained 5.0% for the year.
Factors Driving April’s Gains
In our view, April’s gains reflect Wall Street’s sense that the worst is behind us and getting back to normal may be less tricky than originally feared. We’re not convinced.
To be clear, we’re not perma-bears. Those who are always bearish may, like a broken clock, be proven right once or twice in a 10-year market cycle. (The return-damaging cost of their being wrong most of the time is rarely discussed.) We are cognizant that over the long run, optimism pays when it comes to investing. But we are realists, and we temper our hopes with reasoned caution and known facts.
Right now, we have far too few of the latter. We still don’t know how successful or not antiviral drugs will be in driving mortality rates lower … whether reopening states will need to close down again in short order … if there will be a second wave of the coronavirus in the fall or winter … if unemployment and economic contraction will carry through 2020’s third or fourth quarters … how long it will take to develop a vaccine, or if it will be possible to do so … or how consumers and businesses will behave this year and next.
The disconnect between the dismal economic and earnings data and the market’s rally is as wide as we’ve seen in our more than 25 years in the investment business.
In the meantime, more than a dozen states have begun to reopen for business. Overseas, whole countries are, or are considering, doing so. Rather than champion such gambits, we’ll be analyzing how such moves pan out. We hope that we won’t see a resurgence of COVID-19 cases—but we’re skeptical that this will prove to be the case.
Meantime, the massive stimulus efforts from the Federal Reserve and central banks worldwide have provided the sense of an economic safety net. That is much better than there being no safety net, but the fact that monetary policymakers are issuing more, not less stimulus suggests to us that we have a long way to go to ensure the net is wide and strong enough to stimulate a return to economic progress.
Incomplete Data Complicates Projections
While we continue to monitor the medical data carefully, economic and earnings data reflecting the impact of the coronavirus pandemic on the U.S. economy is rolling in, though it remains woefully incomplete.
Consumer spending, the lifeblood of our economy, dropped precipitously as Americans banded together to follow stay-at-home policies during March. The first quarter’s economic contraction was estimated to have compounded at a 4.8% rate, the worst quarterly decline since the last three months of 2008.
That’s just the first report of three estimates we’ll see on first-quarter economic growth—but revisions during recessions tend to get worse, not better. For the moment, it’s all we have to go on.
When so much has happened so quickly, it’s worth recalling that economic activity during the first two months of the first quarter was fairly strong. It wasn’t until March that consensus coalesced around the idea that the novel coronavirus was a spreading global pandemic, not a seasonal flu. That means the first-quarter GDP report only reflects one bad month. The second quarter—the one we’re in now—will truly show how deeply economic activity has retrenched.
Economists we follow are changing their projections almost daily, and by large margins. Just as economic “seers” are known to have predicted eight of the last two recessions, their current estimates of economic loss or gain should always be taken with a large grain of salt.
Job Losses Cut Consumer Spending
First-time unemployment claims “slowed” this week to 3.8 million filers. Over the last six weeks, more than 30.3 million workers have been let go—that’s almost 19% of the U.S. workforce. It’s no surprise that record job losses have led to a record drop in consumer spending—most people cut back on their expenses where they can when they lose their income. Shelter-in-place practices only compounded the impact. Consumer spending fell 7.5% in March—the biggest monthly drop since records began in 1959, and far more than the previous record decline of 2.1% in January 1987.
There will be many knock-on effects of so many people losing their jobs at the same time, but we’ll have to wait and see the full extent of the damage. For example, it will be months before we see what’s happened to household debt levels and bankruptcy rates for individuals and businesses.
Financial Planning Focus:
The CARES Act’s Unemployment Benefits
As the COVID-19 crisis continues, unemployment benefits have become a lifeline for more than 30 million Americans. As part of the CARES Act, these benefits were updated and upgraded. If you lost your job as a result of the pandemic or actions taken to combat it, it’s worth your while to understand how unemployment benefits may help you.
Here’s what to know if you or a loved one is filing for unemployment benefits:
- Self-Employed Assistance. Previously, only W-2 wage workers could qualify for unemployment benefits. Freelancers, contractors and other self-employed workers were out of luck. Under the CARES Act, self-employed workers now qualify for the same benefits that other workers enjoy. If you think you may fall into this category, be prepared to provide proof that you are not able to perform your job as a result of COVID-19.
- No Waiting Period. Previously, you had to wait one week to receive unemployment benefits, a provision intended to incentivize individuals to return to work as soon as possible. The CARES Act changes this by allowing state governments to eliminate this one-week period, with the federal government on the hook to reimburse states that elect to do so.
- $600-Per-Week Increase. Unemployment benefits vary state to state. We encourage you to check with your state’s unemployment website to see if it has a calculator to help approximate your weekly check. Before the CARES Act, a typical benefit would be about half of your normal paycheck. The CARES Act bumped this benefit by an additional $600 per week.
- 13 Extra Weeks. Unemployment payments used to cease after 26 weeks. As a result of the CARES Act, that time has been extended by 13 weeks. Now an eligible individual can collect a total of 39 weeks of benefits between January 27 and December 31, 2020.
- How to File. This hasn’t changed. If you believe you may be eligible to receive unemployment benefits, you should plan on filing your claim with the state you were earning in. Click here to find out how to file in the state that you live in.
The key takeaway here: Make sure you are receiving everything you are entitled to. Due to the massive influx of newly unemployed individuals, there may be some delays when filing your claim online. However, know that the benefits you eventually receive will be retroactive based on when you lost your job.
Adviser Investments’ Market Takeaways
Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begin providing Today’s Market Takeaways, short videos in which one of our investment team analyzes what the market’s telling us. We posted two new Market Takeaways videos this week, featuring EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin and Vice President Steve Johnson on governors’ plans to reopen their states and the “fear of missing out” driving April’s markets.
We’ll continue adding to what we know about the state of the economy next week with reports on factory orders from March and April data on manufacturing, the service sector, earnings, jobless claims and the unemployment rate.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, May 1, 2020, before the market’s close.
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