U.S. equities broadly posted their best weekly gains since 1974 driven by initial signs of a plateau in new confirmed Covid-19 cases in hot spots in the U.S. and internationally and by the announcement of additional stimulus from the Federal Reserve. For the holiday-shortened trading week, the S&P 500 gained 12.1%, while the Dow and Nasdaq Composite rallied 12.0% & 10.6%, respectively. The massive rally stood in stark contrast to the bleak economic developments that saw another 6.6 million of Americans filing for unemployment, adding to the 10.1 million citizens who filed in the prior two weeks. The Congressional Budget Office now expects the unemployment rate to rise by more than 10% in the second quarter. Despite the worsening economic picture, bond yields moved higher with the 10-year Treasury yield rising to 0.73% from 0.59% in the week prior as market participants shed safer assets in favor of riskier assets like equities.
Meanwhile, oil prices have barely budged after a historic agreement on Sunday night among 23 oil-producing nations, led by the U.S., Russia, and Saudi Arabia, to collectively cut oil production by 9.7 million barrels a day, which is over 13% of global production. The limited price reaction, with U.S. crude oil still down 63% this year at $22.35 per barrel, was driven by concerns that the supply cuts may be too little, too late as oil demand is expected to drop up to 30 million barrels per day this month due to global economic lockdowns.
Though investors are having difficulty comprehending the economic fallout from coronavirus shutdowns, the Federal Reserve’s announcement of $2.3 trillion in new lending programs last week helped buoy investor sentiment and send stocks higher. Those measures come in addition to the record stimulus already announced including the $2.1 trillion CARES Act passed by Congress and unlimited quantitative easing from the Federal Reserve.
However, looking to the week ahead, investors are bracing themselves for the start of first quarter corporate earnings season with several of America’s biggest banks on the docket to report results. These financial institutions will provide insight of credit and financial health across consumer and commercial business lines and show how the financial sector is coping with the crisis. According to FactSet, earnings for the S&P 500 are expected to fall almost 10% in the first quarter compared to a year ago, and analysts are forecasting a 21% drop in earnings for the second quarter of 2020.
As the pace of daily new cases begins to slow, the key question now is when and how to reopen the economy and get people back to work. The answer will need to walk a delicate balance between moving too quickly and triggering a second wave of infections on one side and moving too slowly and escalating economic damage on the other. Operations may not fully return to normal until an effective vaccine is developed, which is estimated to be at least a year away. In the meantime, testing capacity will be the key to navigating this balance from today to the new economy. Testing must be scalable, easy, and noninvasive to make sure people are willing to do it. It will likely not be a one-size-fits-all strategy across the economy, but instead will need to be a gradual and adaptable strategy customized to regions and industries. Our investment team will be closely assessing the ability of proposed solutions to economic resumption in striking this balance in the weeks ahead while maintaining a close eye on economic and corporate earnings data to gauge the impact near-term. We will continue to keep you apprised of our thoughts.
