FINANCIAL MARKET UPDATE 5.12.2020

STORY OF THE WEEK

STOCKS LOOK BEYOND BAD ECONOMIC DATA

The impact from the economic shutdown has started to show up in the data, and the results thus far have not been good. GDP in the 1st quarter, for example, saw its sharpest decline since 2008, and the April jobs report showed the highest unemployment rate since the Great Depression. Despite these historically bad prints, stocks have continued to climb. How is this possible?

The answer largely relates to a concept we have written about in the past: the market is forward-looking. Rather than waiting for official news, asset prices move based on what’s anticipated. This helps to explain why the S&P 500 experienced one of its largest monthly declines ever in March (-12.5%), despite major COVID-19 outbreaks (like the one in New York) not peaking until mid-April. The market was expecting the response to the coronavirus outbreak to hurt business earnings, cost jobs, and slow economic growth. To some degree, prices moved in February and March based on the bad data we are just now getting. This similarly explains why the S&P 500 had one of its best monthly gains ever in April (+12.7%), potentially during the height of the health crisis. Unprecedented fiscal and monetary stimulus, progress on COVID-19 treatments, and the prospect of slowly reopening parts of the economy have investors looking beyond the ugly data and seeing better times ahead.  

When the S&P 500 is down over 30% like it was in late March, it doesn’t take much to justify a reversal. You don’t necessarily even need positive news, just being less negative than originally expected can do the trick. From this perspective, at least some of the market rally seems justified, given we appear to have avoided many of the worst-case scenarios related to the outbreak. As stock prices rise, however, the bar that growth must surpass to justify more gains also rises. The stock market may be forward-looking, but it can’t predict the future. If the rally gets ahead of itself, you could start to see bad news trigger declines again.

Things will get better. We just don’t know how long the recovery will take. In the meantime, investors should stay prepared for the potential for more volatility.

WEEK IN REVIEW

  • Data published by the Labor Department showed that 20.5 million jobs were lost in April, pushing the unemployment rate up to 14.7% (slightly better than the 15.2% forecast by economists per MarketWatch). Both the number of lost jobs and the unemployment rate were the highest in the post-World War II era. Some of the details in the report were worse than the headline figures. The “U-6” unemployment rate, which includes workers not looking for jobs and the underemployed, increased to 22.8%.
  • This morning the Bureau of Labor Statistics published its April Consumer Price Index (CPI) data, which showed prices increased by 0.4% in the past year. For context, the Federal Reserve targets 2.0% as a healthy level of inflation. The Core CPI figure (which strips out the volatile food and energy price segments) declined 0.4% in April, the largest monthly decline since records began in the late 1950s. Within the Core figure, apparel and transportation services saw the largest declines (4.7% each).
  • So far, 66% of S&P 500 companies have reported Q1 earnings. If you blend the results of companies that have reported with the estimates for companies that have yet to report, earnings declined 13.6% during the quarter (the largest decline since Q3 2009).

HOT READS

Markets

  • A Record 20.5 Million Jobs Were Lost In April as Unemployment Rate Jumps to 14.7% (CNBC)
  • Consumer Prices Saw The Largest Monthly Drop Ever in April (CNBC)
  • Off the Charts (Irrelevant Investor) The economic shutdown has broken many historical charts

Investing

  • Does Covid-19 Prove the Stock Market is Inefficient (AWOCS)
  • Latest Memo From Howard Marks: Uncertainty (Howard Marks)

Other

  • ‘The Last Dance’ Winners and Losers (CBSSports)
  • As Restaurants Remand Shuttered, American Cities Fear the Future (NYT)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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