COVID-19 Market Update: May Finishes with Solid Rally
Stock markets extended their gains for a second consecutive week, finishing off the month with a solid rally on news of a gradual reduction in lockdown restrictions and an accompanying economic recovery later this year, coupled with a falling number of COVID-19 cases and deaths. What has marked this market since the first of the year’s early advancement in January and early February is the swiftness and magnitude of the decline into March and speed of the bounce off the March 23 lows. Most market observers are perplexed and debate for the reasons for the speed of the turnaround. For the week, the TSX gained 2.1% and down 10.9% YTD, the S&P 500 finished the week up 3.2% and down 5.8% YTD, and EAFE climbed for the week up 5.2% and down 14.2% YTD. It is interesting to point out that the heavily weighted Nasdaq advanced within 3% of the February high. Utilities provided leadership for the week while energy was the big loser on news of increasing domestic inventory levels.
Economic news, certainly alarming in absolute terms, was not as bad as first estimated. April durable goods orders excluding transportation fell 7.4% compared to the original estimate, which was almost double the reported decline. The number of unemployment benefit applications for the week came in at 2.1 million, down from the previous week. Continuing claims for unemployment benefits dropped 3.86 million to 21.05 million, down from 24.9 million in March. The unemployment rate hovers around 14.7% for April. Pending homes sales declined 21.8%, while new home sales increased 1% in April compared to an earlier expectation of a 22% decline. Another encouraging trend, mortgage applications are up for the last consecutive six weeks as buyers secure financing in anticipation of a purchase. The 30-year fixed mortgage rate in the US fell to 3.15% from 3.99% a year ago. Median home prices in the US dropped 8.5% annually to $309,900. In Canada, CMHC estimates in 2020 a decline between 9% to 18%, depending on the region, from pre-COVID levels.
The sustainability of the market rally is tied to the resilience of the recovery. Some quarters are expecting the US GDP to fall 40% annualized in the second quarter, the worse decline since the depression. The Chicago Fed’s National Activity Index, earlier in the week, reported a decrease of 16.4% for April, down from a revised negative 4.97% in March. Usually, a three-month moving average is commonly used to smooth the monthly volatility. For April, the three-month number came in at a negative 7.22 from a negative 1.69 March ending average. A reading below a negative .70 is associated with a recession, whereas a zero reading indicates an expansion. Production-based indicators declined to a negative 5.63% from March’s negative 2.31%, and employment indicators fell 9.06% versus 1.06% in March.
Since this economic downturn was triggered by a biological panic, not a financial one, the road to recovery will be determined, in part, by several factors: monetary and fiscal support, a cure for the virus, and behavioral changes of the consumer impacting spending patterns, to mention a few. The monetary and fiscal authorities acted with unprecedented speed. The cure for the virus is months away, maybe years, and depending on your source, it may never be any more effective than treatments for other coronaviruses such as some common colds, which, believe it or not, are considered a coronavirus. The most impactful will be the behavioral changes of the consumer. Social distancing, for a segment of the population, maybe here to stay, altering the way we travel, socialize, manufacture, conduct business, manage the sales process, educate, and other activities impacting economic growth. Like 9/11, the COVID panic of 2020 will have a lasting impact on generations to come.
With interest rates at historic lows, an impending debt crisis on the horizon, political uncertainty and social unrest, investment strategies will require flexibility and creativity. We look at the future with optimism knowing as with other crises; we will survive and flourish.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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