U.S. stocks struggled for direction last week but closed lower as the fallout from the coronavirus pandemic has become increasingly present in economic data, including another record increase in unemployment claims. For the week, the S&P 500 lost -2.1%, while the Dow and Nasdaq Composite slid -2.7% and -1.7%. Smaller capitalization companies faced a much sharper sell-off as the Russell 2000 index tumbled -7.2% for the week. As stocks slid, investors increasingly sought out safe haven assets like U.S. Treasury bonds, with the 10-year Treasury yield driven down to 0.59% from 0.73% in the week prior due to higher demand. Meanwhile, oil prices surged with WTI crude oil climbing 87% to $29.00/barrel from just $15.48/barrel last Friday on hopes that Saudi Arabia and Russia would reach an agreement to cut production by over 10 million barrels a day.
Early trading this week has quickly reversed last week’s losses and then some on optimism that the outbreak is showing signs of leveling off in key hotspots here in the U.S. and globally in some of the hardest hit regions like Italy and Spain. Governors of New York, New Jersey, and Louisiana pointed to tentative data on Monday that hospitalization rates are slowing as a result of social distancing. While this data is encouraging on the progress of strict social distancing measures in containing the spread of the virus, the global economy still faces daunting challenges before it can resume what “normal” once was.
Market participants have started to get a picture of the severity of the economic disruption from the coronavirus as U.S. initial unemployment claims in the past two weeks almost reached 10 million on a combined basis. Additionally, Friday’s March employment report, which wasn’t yet expected to show much impact from the virus shutdown with a consensus expectation for 137,500 jobs lost, stated 701,000 job losses, bringing the unemployment rate to 4.4% from 3.5% in the month prior. April’s figures, which will include the recent spike in unemployment, will likely be much worse. The level of uncertainty around where unemployment will peak remains high but many economists are projecting that the unemployment rate could surge temporarily to levels not seen since the Great Depression.
Swift government aid is key to filling the gap during this period of lost income. Amid struggles to get the Treasury Department’s $350 billion lending program for small businesses up and running, the Federal Reserve is stepping in. The central bank promised to take steps to get the money flowing quickly, which may involve the Fed’s either lending directly to banks participating in the program, or buying the loans once originated so that lenders don’t have to carry the debt on their books. More details are expected this week.
The slowing spread of the coronavirus is crucial in getting a baseline for the time until economic activity can start to be resumed and it helps reduce the likelihood of some worst case scenarios, which has provided a boost to stocks. However, it will still be a long road back as economic lockdowns remain in place in many important economic regions and consumer demand and business investment may be slow to recover in many areas, especially if easing social distancing measures results in a second wave of cases. In the week ahead, our team will continue to monitor the number of new cases for confirmation of a deceleration, in addition to the economic repercussions on unemployment claims and consumer sentiment.
