May 04, 2020 – KERR MARKET SUMMARY
In 2020 fashion, April was unique. The world continues under the new normal of social distancing and constant coronavirus headlines. Financial markets remain volatile though positive in April during this lockdown as the health and economic costs of the virus continue to impact the world. Some countries are beginning to see a stabilization in the rates of new infections, giving us all some much-needed light at the end of the tunnel. This stabilization is leading many governments to slowly release their lockdown exit strategies and initiate plans to gradually reopen the economy. This news provided investors with an increase in confidence in financial markets, which began to rapidly rebound in April. It now appears we may be reaching the peak of the situation, as such authorities are now exploring how to reopen without unnecessary risk taking.
On the economic front, the item that stands out is certainly the rate of unemployment. Over the past decade, unemployment has steadily decreased from the high of 15.3 million jobless Americans during the 2008 financial crisis. It is estimated that 30 million Americans have filed for unemployment over the last month largely tied to the spread of COVID19. The highly anticipated first quarter earnings reports will give us more clarity on how businesses have been impacted, and what the outlook is for the rest of 2020. Another key item this month was the highly dysfunctional oil market., This time however the focus was on the U.S. as West Texas Intermediate crude oil, the US Benchmark oil contract, crashed to negative prices for the first time in history. As oil demand dried up over the lockdown and many producers were having trouble in managing storage, selling was reinforced. As intense as the onset of the pandemic was, policymakers are responding with aggressive global fiscal and monetary tools and strategies to navigate these volatile times.
In fixed income news, central banks continue taking giant strides in an attempt to maintain control over the situation. The Federal Reserve continued expanding its programs to support markets and the economy, at the end of April, Fed Chairman Jerome Powell clearly stated that these provisions are here to stay until there is more certainty for an economic recovery. April was a record month with $285 billion worth of U.S. investment grade corporate bond issuance. Central banks actions to purchase government and corporate bonds sent bond prices higher. The increase in risk appetite allowed corporate bonds to outperform government issues during the month. The pandemic is certainly leading people across the world to share similar experiences, foreign central banks are equally focused on finding ways to support their local economies. The European Central Bank also applied Quantitative Easing measures and are prioritizing the purchase of government bonds of the hardest hit countries such as Spain and Italy. Emerging markets are following suit, countries like South Africa and Turkey are cutting rates in an effort to support their economies. The Bank of Canada announced that Tiff Macklem would succeed Stephen Poloz as Governor of the Bank of Canada this summer. Macklem has held senior roles with the central bank over the last two decades, and his experience in promoting growth policies during this current period will be welcomed.
In equities news, social distancing has had a significant impact on the economy with large declines in in hospitality, real estate and travel. Energy companies were also hit this month as oil prices continue to fall in response to lower demand. However, it seems like the Fed’s creative tools to continuously jolt the economy with stimulus packages in the trillions of dollars may be positively impacting financial markets. Likely due to a combination of colossal stimulus packages to buoy markets and speculation that the crisis may be short lived, April treated equity markets very well. As counterintuitive as it may seem, the S&P500 and the Dow Jones Industrial average both rallied higher. The S&P500 climbed 13% posting the biggest monthly return since 1987.
Undoubtedly, the economic cost of the shutdowns has been enormous, with numerous actions to support households and businesses such as emergency funding, officials worldwide are putting their best foot forward in this unparalleled journey. Success of economies bracing through this and emerging victorious will depend on how they handle their reopening, habits need to change, businesses need to pivot and sometimes reinvent themselves in a new economic landscape as it seems like social distancing is here to stay for some time. We maintain a watchful eye on how the gradual reopening of the economy will progress, and how people and the financial markets will react.
Sources: Capital Economics, National Bank, Globe Investors
