Snapshot April 20th, 2020
Market Review: Week Ending 4/17/2020
US stocks rose for the second consecutive week as the S&P 500 Index gained 3.0% last week to close at 2874.1 The Index has now rallied 31% from its March 23rd low,1 led by the high-growth Technology stocks and other “stay-at-home” beneficiaries. Stocks rallied last week on news of positive developments in an early stage drug trial from Gilead Sciences1 and from news that a partial lifting of the stay-at-home decrees in 27 states will occur on May 1st. Earnings reports for Q1 last week were generally ignored by investors, with most companies withdrawing guidance. The exception were bank stocks, which sold off meaningfully after reporting large increases in reserves for future expected delinquent loans.1 On the positive side, defensive names like Johnson and Johnson and Procter & Gamble reported little impact from Covid-19 and raised their dividends1. It’s clear that investors had accepted and discounted economic conditions unlike anything seen since the Great Depression during the 35% fall in stocks from February 19th to March 23rd,1 deciding to look ahead to 2021 as to what the recovery could potentially look like. Optimism among equity investors seems high, driven by monetary and fiscal stimulus that amounts to 18% of GDP,1 an unprecedented amount. This optimism has not been shared by bond investors as the safety of US Treasury Bonds continues to attract inflows with the 10-year Treasury Bond yield sitting at 0.64%, near its all-time low.1 This optimism has also not been shared by Small-Cap US stocks, normally first to respond to cyclical improvements in the economy, as the Russell 2000 Index fell 1.4% last week and is still down ~26% in 2020.2 Equity bear markets rarely last one month and domestic stocks appear to be discounting a V-shaped economic recovery (quickly down, then quickly up) that we think is unlikely. We remain slightly underweight equities and think a pullback is probable once the reality of something less than a V sets in. When that occurs is difficult to predict. Through the close Friday, year to date results for the major indices are as follows: S&P 500 -10.5%, Russell 2000 -26.0%, MSCI EAFE –19.7% and Bloomberg Barclays Aggregate Bond 4.7%.2
What We’re Watching in the Week Ahead
- Re-opening Steps – With President Trump confirming the authority to reopen the economy and lift the stay-at-home mandates rests with State Governors1, we’ll be watching for plans of the reopening and attempting to estimate when, and if, activity can return to normal. We will also be watching the daily data on new cases and deaths from Covid-19, as any relapse in the encouraging trends recently would greatly impact investor sentiment.
- Oil – OPEC+ agreed to slash production by a record 9.7M barrels per day1, but oil prices have continued to fall with WTI now under $20/barrel.1 Concerns that the cuts will not be enough to head off oversupply exists as demand forecasts are being slashed due to the coronavirus. The US Energy Department reports that domestic producers recently boosted inventories by a record 19.2M barrels added to concerns, with fears that many energy producers could go bankrupt and cause systemic risks to the economy.
- Earnings Reports – Q1 earnings reporting season continues this week, with bellwethers such as Netflix, Procter & Gamble, Texas Instruments, IBM AT&T, Delta Airlines and Intel set to report.1 Results from a world that existed in Q1 hardly matters at this point, so we will be watching for signs of stress on balance sheets, cash flow shortfalls and for indications of the company’s ability and intentions of paying the dividend in all Q1 earnings reports.
As always, we appreciate your confidence in our team.
Fundamentum Investment Committee
Chad Roope, CFA® Portfolio Manager
Paul Danes, CFA® – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn, CFA® – Chief Compliance Officer
1-Morningstar Direct 4/20/20
Investment advice offered through Fundamentum LLC a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the investment objective of any investment strategy will be attained. Investing involves risk including loss of principal. Past performance is no guarantee of future performance. All indices are unmanaged and may not be invested into directly.