Happiness comes from spiritual wealth, not material wealth. Happiness comes from giving, not getting. If we try hard to bring happiness to others, we cannot stop it from coming to us also. To get joy, we must give it, and to keep joy, we must scatter it. – John Templeton
The stock market succumbed to selling pressure again last week as the news on both the spread of the coronavirus and the economy took a turn for the worse. In terms of market volatility, it was the calmest week since the first week of March but that provided little comfort to investors with the S&P 500 Index falling 2.1%. Unfortunately, the number of confirmed Covid-19 cases continues to grow along with deaths from the virus, prompting social distancing guidelines to be extended to April 30th. It is hoped that the death rate from the virus will peak in the next two weeks and that the curve of new cases will begin to flatten out before month-end. Indeed, the next two or three weeks could be painful and from an economic standpoint, the pain was evident in the job losses reported last week. On Thursday, weekly jobless claims soared to 6.6 million, which was double the previous week’s total, and brought the two-week total to about 10 million. The March employment report also painted a grim picture as U.S. payrolls dropped by 701,000 and the unemployment rate rose to 4.4%, the worst jobs report since the Great Recession in 2009. Two-thirds of the lost jobs were in the hospitality industry and the overall numbers in subsequent months are likely to get worse. Despite the bleak economic and health news, there were some reasons to be optimistic about the future. Italy saw its smallest increase of Covid-19 cases in two weeks and both Chinese manufacturing and services sector data rebounded strongly in March. The peak number of coronavirus cases reached in countries such as China, Japan and other Asian countries has also signaled a potential bottom in their stock markets. Corporate insider buying reached an 11-year high, too, as share price declines from panic-selling offered tremendous value for long-term investors. Another victim of the global pandemic has been the price of oil, which had plunged to below $20 a barrel as demand has evaporated while supply has increased due to the price war between Saudi Arabia and Russia. After talking with the leaders of both countries, President Trump said he expected them to agree to cut production by about 10 million barrels as early as this week. Crude oil prices surged on the news and the proposed cuts should help the U.S. shale industry, which has been devastated by the severe decline in the price of oil.
As might be expected, all of the other economic news was also disappointing last week. The ISM manufacturing index in March fell into contraction territory while the Chicago Purchasing Manager’s Index (PMI) slipped again in March, marking the ninth straight sub-50 reading as manufacturing continues to shrink. The consumer confidence index dropped to 120 in March from 133 in February but was better than expected.
For the week, the Dow Jones Industrial Average fell 2.7% to close at 21,052 while the S&P 500 Index dropped 2.1% to close at 2,488. The Nasdaq Composite Index declined 1.7% to close at 7,373.
Both the producer price index (PPI) and the consumer price index (CPI) for March are expected to be virtually flat as inflation remains benign. Not surprising, the preliminary University of Michigan consumer sentiment index for April is expected to show a steep drop from levels in March.
The stock and bond markets will be closed on April 10th in observance of Good Friday.
There are no notable quarterly corporate earnings reports scheduled for this week.
Although new cases of the coronavirus may have peaked in Italy and China, it may be as long as six weeks before that actually occurs in the U.S. In the meantime, the economic data that is released will likely not improve as the economy remains virtually shut down in order to contain and mitigate the spread of the virus. The massive fiscal stimulus package that includes direct cash payments to individuals, loans to small businesses, increased unemployment benefits and aid to hard-hit industries will certainly help matters but it won’t prevent the U.S. from falling into a fairly deep recession. The Federal Reserve has also adopted a “whatever it takes” mentality by cutting interest rates to zero, pumping $1 trillion into the economy and providing much-needed liquidity through quantitative easing and other measures. The monetary policy response by the Fed has so far exceeded the one during the Great Recession and the financial crisis in 2008 and 2009. Unfortunately, the oil price war between Saudi Arabia and Russia could not have come at a worse time. Neither country has been interested in an agreement to cut oil production during a time when global demand has plunged. Unless they can agree to cut production, there are likely to be more layoffs in the energy sector and more bankruptcies in the shale industry. While it is difficult to make forecasts in this uncertain and unprecedented environment, corporate earnings are likely to decline significantly in the second and third quarters but rebound by the end of the year. It took just 26 days for the stock market to go from all-time highs to a bear market, the fastest such move in history, and we are likely to remain in a bear market for a while. Volatility will continue to be high with sharp rallies and declines but there is a good chance that the low for the market established back on March 23rd will remain intact, although there is an equally good chance that we could revisit it. The current yield advantage of stocks over bonds has widened considerably to unprecedented levels as the yields on the 2-year Treasury and 10-year Treasury are 0.23% and 0.62%, respectively. This is no time to panic but a good time to review whether your long-term investment strategy and asset allocation matches your time horizon and risk tolerance.