This Week's Market Moves | April 27, 2020
This is truly an unprecedented time in the financial markets. First, it was negative interest rates, now, we have negative oil prices. What’s next? Here’s what else has been driving the markets this week.
Oil prices plunged below zero for the first time, in an unprecedented wipe-out ahead of the expiration of the May contract this week. The day before the contract expired, oil prices dropped to -$40.32 a barrel. Yes - negative $40. The lack of storage capacity combined with the stunning collapse in demand from the pandemic-driven shutdowns and a price war among the world’s biggest oil producers, have sent oil prices into an absolute tailspin.
With the barrage of gloomy economic data, stock prices ended the week modestly lower. The S&P 500 index is trying to hold onto its gains from the March 23rd low, anticipating a quick recovery due to the enormous amount of fiscal and monetary stimulus thrown at the economy over the last few weeks. With second quarter economic data likely to be horrendous, it remains to be seen how long the disconnect can continue.
Earnings season has not brought the clarity into the health of corporations that investors are used to seeing. Corporate executives typically provide updates on future revenue, profits, and sales forecasts, but given the uncertain environment, forward guidance has largely evaporated. Thus, industry analysts have provided their best guess at what earnings will look like in 2020. While earnings estimates have declined considerably, it remains to be seen whether they are realistic, considering the current economic backdrop.
U.S. Treasury yields held steady this week with the 2-year yield up 2 basis points to 0.23% and the 10-year yield down 5 basis points to 0.60%. However, credit market stress continues to ease, as the Federal Reserve’s liquidity injections appear to have stabilized the markets. The improved market conditions have led to a wave of new bond issuance in recent weeks.
The spectacular collapse in Treasury yields this year has made stocks more attractive to investors from a dividend perspective. The flight-to-safety into Treasuries has brought interest rates to historical lows, offering little in the form of interest income for investors. While dividend cuts may be on the horizon, the S&P 500’s dividend yield (1.5%) is nearly three times higher than the 10-year Treasury (0.6%).
The staggering number of job losses continues to mount. This week, another 4.4 million Americans filed for unemployment benefits, bringing the total filings since late March to more than 26 million. While the initial wave of coronavirus layoffs occurred from restaurants, hotels and factories, job losses appear to be spreading across a wider swath of industries, as employers begin to worry about their revenue and profitability.
While difficult to believe, the $349 billion allocated to the Paycheck Protection Program (PPP) to provide loans for small businesses ran out of money in just 13 days. Larger firms appear to have gobbled up the money before small businesses were able to get through the red tape. However, a $484 billion relief package was approved this week to replenish the funds available for small businesses and to provide additional aid for hospitals and coronavirus testing.
Business activity across the globe collapsed in April, as government officials throughout the world shut down the economy to combat the pandemic. The Purchasing Managers Index (PMI) in the U.S. plummeted to an 11-year low of 27.4 in April, a sharp decline from the 40.9 reading in March. A reading below 50 signals a contraction; the lower the index level, the steeper the fall. Similar declines occurred in Japan, Germany, France and the U.K.
Indices: Core Bond: Bloomberg Barclays U.S. Aggregate Index, High Yield: ICE BofA US High Yield, Large Blend S&P 500 Index, Emerging Markets, MSCI EM NR USD, Foreign Equities: MSCI ACWI Ex USA NR USD, REITs: DJ US Select REIT, Small Cap: Russell 2000
Note that this article was published on April 27, 2020. Data represented is as of the publication date. The information contained herein has been obtained from sources that are believed to be reliable. However, Cammack Retirement Group does not independently verify the accuracy of this information. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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