April 17, 2020
Optimism for a flattening COVID-19 curve in the U.S. and high hopes for Gilead’s experimental drug treatment for COVID-19 pushed the S&P 500 to a 3.04% weekly gain. The move comes on the heals of last week’s 12.10% rise, the index’s best one-week performance since 1974. The positive developments sparked investor optimism that the country would soon be able to re-open and get back to business. On the economic front, the data remained nothing short of dismal with retail sales plunging to a record low and another 5.245 million people applying for unemployment benefits. We also got our first read of global economic growth from China, who entered lockdown a month prior to the rest of the world. Not surprisingly, China’s Q1 2020 GDP shrank dramatically, but less than anticipated.
Shopping in the Times of Coronavirus
The run on toilet paper, bleach, and face masks were not enough to blunt March’s retail sales figures. Retail sales fell 8.70%, their biggest decline since the government began tracking the series in 1992. Defensive sectors did best as Americans hunkered down. Food and beverage sales rose 25.60%, general merchandise sales were up 6.40%, and health and personal items registered a 4.30% rise. Despite these strong sales figures, a 25.6% decline in autos, a 26.5% drop in restaurants, and a 50% decline in clothing sales served to drag down overall results. In the short-term, we do not expect to see much of a retail sales bounce as consumers remain cautious to spend amidst continued layoffs. For the week ending April 11th, an additional 5.245 million people applied for unemployment benefits, bringing the total number of claims to just over 22 million. For context, both the 1990-1991 and 2001 recessions saw total, initial jobless claims of approximately 15 million over a period of 36 weeks. The 2007-2009 recession resulted in approximately 37 million claims over a period of 79 weeks, which thus far we’ve managed to capture nearly 60% of in a mere four weeks.
COVID-19 Demand Shock Hits China GDP
Serving as a proxy for things to come for the rest of the global economy, China released its Q1 2020 GDP figures. For the quarter, the country saw a 6.80% drop in economic output as Beijing implemented large-scale shutdowns and quarantines in order to contain the spread of coronavirus. The drop was the first quarterly decline since at least 1992 when official quarterly records began. Digging into the reports, the numbers were ugly. Industrial production fell 8.40%, fixed-asset investment fell 16.1%, and retail sales fell a staggering 19%. Having been ground zero for the outbreak, China Q1 results were more heavily impacted than what we might expect elsewhere, and as bad as the numbers were, they were better than expected. China is now emerging from its lockdown and their economy is beginning to restart, which thus far appears to be working without a significant resurgence of the disease. On Thursday, China reported only 42 new cases, and all but four cases were imported. Things are still far from normal in China as social distancing measures remain in place and business activity is lethargic, particularly for exporters who have seen a sharp drop in global demand as the epicenter of the virus has shifted to the U.S. and Europe.
Markets have enjoyed a remarkable rally over the past two weeks believing they are seeing the initial green shoots of a recovery. From the beginning, we’ve structured our view for a recovery on two items. The first was to successfully solve the underlying health problem. If you stop or contain COVID-19 then, and only then, are you in a position to deal with the true economic damage. The stay-at-home orders for much of the nation seem to be having a positive effect on flattening the curve, reducing the number of deaths, and preventing a collapse of our healthcare system. Various treatments are showing promise in combating the disease, and there are hopes that a vaccine could be distributed in limited amounts by the fall. The worst-case scenarios now seem to be all but off the table, and there is a strong bias towards better than expected outcomes on the healthcare front now baked into the market. That seems a reasonable position justifying a sizeable bounce off March’s bottom, and the market is now focused on repairing the economic fallout and on earnings normalization. With the market now just 15% below its all-time high in February, the concern has to be whether this is all too fast, too quick. Aside from a miracle cure, the past three weeks could not have provided a better cadence of positive development for a market that was previously in turmoil. There has been a strong monetary response, fiscal response, and health response to the point where markets are now being valued in anticipation of where they believe things will be in September. That’s a long way from here, and while we are bullish, we also try to be realistic. There is a lot that still needs to happen to get this economy back to work, and it’s hard to imagine the market just going sideways from here simply waiting for Q3 earnings. A vaccine or treatment changes the entire calculus in what we are saying, but absent that, a continuation of the rally too much higher from here would border on irrational in our minds. Q1 and Q2’s earnings are still ahead. There is a ton of debt workout and negotiations that will need to take place, and it is going to take time to know what impact it will have on both Main Street and Wall Street. Then, there is the issue of jobs and — longer term — interest rates and taxation policy. It’s not that we don’t think we’re seeing definitive signs of green shoots. We are. It is just that we believe that it will take some time before it all bears fruit again.
The Week Ahead
Earnings season continues with reports from tech giants Intel and Texas Instruments. We’ll also check in on durable goods orders and the housing market.
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