COVID-19 Market Update: The Drivers of Uncertainty and Optimism
Equities across the board stumbled last week to their biggest weekly drop in almost two months, giving back most of the previous week’s gains. For the week, the S&PTSX was down 2.2%, the S&P 500 lost 2.3%, and EAFE fell 3.3%. Small-caps and value stocks were down more than other market segments with health care and consumer staples and consumer discretionary bucking the trend. Energy surged during the week, but energy stocks did not match the gains in oil.
In Canada, April retail sales and industrial production reported the steepest decline on record as the economic activity came to a complete halt across the country. In the US, the Department of Commerce reported a 17.2% decline in retail sales – more than double the consensus estimates. On Wednesday, Federal Reserve Chairman Jerome Powell stated the economy was “subject to significant downside risks” and warned of “lasting damage to the productive capacity of the economy.” He also mentioned the possibility of further stimulus but ruled out negative rates. The U.S. House of Representatives passed an additional three trillion-dollar stimulus bill adding to the already massive current account deficit. However, initial indications are there is little chance of it passing the Senate, which wishes to wait to see the impact of states reopening before adding to an already bloated deficit.
Investor sentiment was delivered a blow when two highly regarded hedge fund managers announced that the market was the second most overvalued market he had ever seen. The other said the risk-reward trade-off was the worst he had seen in his career. On Thursday, the weekly jobless report added another 3 million Americans filing for benefits, bringing the total to over 36 million since the beginning of the COVID-19 crisis. The data, coupled with comments from President Trump and members of the US Senate calling for sanctions against China, was too much for market optimists.
The recovery from the March lows, up until this week, proved resilient in the face of overwhelming negative data. Optimism over states reopening, and the prospects of returning to a healthier economic environment have driven the markets. Time will tell, but as David Rosenberg stated in his recent podcast, within one-year, recessions are all but forgotten. Economic depressions, on the other hand, result in a behavioral change. While the current environment has not been called an economic depression, there is a high degree of certainty that we will see behavioral changes based on what we have witnessed to date. Reluctance on the part of the consumer to engage in what was considered normal activities will drive the future economy. Adjustments to spending habits, business in production, delivery, and supply chain sourcing, work environments, and even social connections for a large segment of the population will change. Uncertainty continues to dominate the sentiment of the people. At the same time, the market advances, causing most market historians and market watchers to speculate why and how high does it go before correcting as in the past. We should not be surprised by what is happening given the market’s recent past performance.
Not surprising as I write this on Victoria Day evening, the U.S. market indices are up well over 3% on a morning comment during an interview with “CBS 60 Minutes” by Chairman Powell that the central bank was “not out of ammunition by a long shot” to fight a recession. COVID-19 data over the weekend continues to slow with fewer cases and even fewer deaths. Optimism, for at least one day, once again has returned after a week’s rest.
As always, continue to be cautious and patient.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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