Coronavirus Update from CIO Brad McMillan, July 2, 2020

Brad McMillan, Commonwealth’s CIO, discusses the coronavirus, including its effects on the economy and markets. Over the past week, we had some bad news on the pandemic front. There were growing viral outbreaks in several states, and the national number of new cases broke the 50,000 per day level for the first time. Although the risks are certainly rising, the appropriate measures are being taken, and we can reasonably expect the outbreaks to peak and start to decline in the next couple of weeks. Turning to the economy, the news was better. Job growth came in much stronger than expected for the second month in a row, with 4.8 million new jobs created last month. Plus, consumer confidence, consumer spending, housing, and auto sales all continued to show improvement. So, how have the markets reacted to this mixed bag of medical and economic news? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Coronavirus Update from Commonwealth CIO Brad McMillan, June 26, 2020

Brad McMillan, Commonwealth’s CIO, discusses the coronavirus, including the economic and market implications. We’ve had some setbacks on the pandemic front this week, with notable outbreaks in Arizona, California, Florida, and Texas. Although we’re not yet seeing a national second wave, the risks are rising. Both the daily spread rate (now at 1.6 percent per day) and daily case growth (about 40,000 per day) have jumped from last week, in large part due to the four outbreak states. Despite this concerning medical news, the economic news was good. Layoffs continued to decline, while hiring continued to improve. Plus, with metrics like consumer confidence, consumer spending, and housing all showing signs of improvement, it appears the overall recovery remains well on track. But will this positive economic data be enough to cushion any market volatility caused by the most recent outbreaks? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Coronavirus Update from Commonwealth CIO Brad McMillan, June 12, 2020

Brad McMillan, Commonwealth’s CIO, provides an update on the coronavirus pandemic, including the economic and market implications. The virus remains under control, with the case growth rate at about 1 percent per day and daily case growth at about 20,000 per day. But while we didn’t see any signs of a national wave of second infections, it was a different story at the local level. Infection rates started to tick up in some states, which is something we need to keep an eye on. The news on the economic side, however, was better. Thus far, the reopening has been happening faster and more successfully than most imagined. In fact, last week’s jobs report revealed 2.5 million jobs were created in May. With economists anticipating a loss of 7.5 million jobs, this result was certainly a positive surprise. Plus, we saw a bounce in consumer and business confidence, as well as a rise in consumer spending. The financial markets had been rising in response to this tailwind of good news, but then we saw some volatility at the end of the week. Is there reason to expect more turbulence ahead? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Coronavirus Update from Commonwealth CIO Brad McMillan, May 29, 2020

Brad McMillan, Commonwealth’s CIO, provides an update on the coronavirus pandemic, including the economic and market implications. We had some good news in the past week, as there were no signs of a second wave of infections even as the economy continued to reopen. The daily spread rate remained at 1.5 percent per day in 9 of the past 10 days, bringing us to the lowest level since the pandemic started. Plus, the daily case growth continued to hold steady, and the number of active cases has begun to level off. On the economic front, layoffs continued to decrease, and people have started returning to work. We’re also seeing positive signs that consumers have the confidence to spend, as shown in the uptick in restaurant bookings and mortgage applications. So, does all this good news mean a V-shaped recovery looks more likely? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Coronavirus Update from Commonwealth CIO Brad McMillan, May 22, 2020

Brad McMillan, Commonwealth’s CIO, gives an update on the coronavirus pandemic, including its effects on the economy and markets. There was some good news on the pandemic front, with daily testing numbers continuing to rise. We didn’t see as much progress in the daily spread rate and the number of new cases, with both remaining relatively stable. Here, the results may be better than they look, as we didn’t get a bump in new cases even though the economy started to reopen. In fact, the economic reopening seems to be going better than many expected. The restaurant business has started to tick up, and mortgage applications have just about returned to 2019 levels. With all signs pointing to a recovery that’s well on track, could recent market volatility be behind us? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Coronavirus Update from Commonwealth CIO Brad McMillan, May 1, 2020

Brad McMillan, Commonwealth’s CIO, discusses where we are in the coronavirus crisis, including a look at the virus itself, the economy, and the market. We had some good news this past week in terms of the virus. The daily case growth rate dropped to under 3 percent per day, and the number of tests given per day increased. Unfortunately, there was bad news for the economy, with millions more people losing their jobs. Even here, however, there are signs that the federal stimulus programs are working, and the peak of the economic damage may be behind us. In fact, the stock market seems to think the recovery may happen sooner rather than later. It is pricing in a V-shaped recovery, with a return to something close to normal by the start of next year. Does the market have it right? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Coronavirus Update from Commonwealth CIO Brad McMillan, April 24, 2020

Brad McMillan, Commonwealth’s CIO, discusses where we are in the coronavirus crisis and what that means for the economy and markets. We’ve seen significant progress in terms of the virus, with the daily case growth rate dropping below 4 percent for several days in a row. Further, the number of tests given has risen from about 150,000 to 300,000 per day. As we turn to the economy, the news is more of a mixed bag. Jobless claims are still very high, although this damage may have started to peak. Plus, with measures like the Paycheck Protection Program and stimulus checks, both individuals and businesses are getting some much-needed relief. Given these signs of improvement, the market seems to be saying the economic recession won’t be as bad as was originally anticipated. But what does all this mean for reopening states and the economy? Watch this video to learn more. Follow Brad at blog.commonwealth.com/independent-market-observer.

Market Update for the Quarter Ending March 31, 2020

Shocking month ends terrible quarter
March was another terrible month for stocks, capping off a turbulent quarter. The continued spread of the novel coronavirus led to even more fear and uncertainty in global markets. The S&P 500 declined by 12.35 percent for the month and 19.60 percent for the quarter. The Dow Jones Industrial Average (DJIA) did even worse, dropping by 13.62 percent for the month and 22.73 percent for the quarter. The Nasdaq Composite performed the best, but it still lost 10.03 percent in March, contributing to a 13.95 percent decline for the quarter.

These poor results came despite improving historical fundamentals. Per Bloomberg Intelligence, as of March 20, the blended average earnings growth rate of the S&P 500 for the fourth quarter of 2019 stood at 1.4 percent, with 99.6 percent of companies reporting. This is a solid improvement from the initial estimate of a 1.2 percent decline. It marks the first quarter with year-over-year earnings growth since the fourth quarter of 2018. Normally, this would be news worth celebrating. But with the shutdown of the U.S. economy and others around the world, past earnings growth is now much less relevant. Investors face significant uncertainty over what future earnings will be.

Technical factors displayed the breakdown in investor confidence. All three major indices ended the month below their respective 200-day moving averages. This result marked the second month in a row below this important trendline for both the S&P 500 and the DJIA. The Nasdaq Composite was a bit more resilient and managed to finish February above its trendline. But the selling pressure in March brought this index below the trendline by midmonth, where it stayed until month-end. This is an important technical signal, as prolonged breaks below this trendline could indicate a longer-term shift in investor sentiment.

Internationally, we saw large declines, as coronavirus case counts around the world spiked. The MSCI EAFE Index dropped by 13.35 percent for the month, leading to a loss of 22.83 percent for the quarter. Emerging markets fell by even more, dropping 15.38 percent for the month and 23.57 percent for the quarter. Beyond the viral crisis, international markets also suffered from rising dollar strength and falling oil prices. Technicals for international markets remained weak, as both indices finished March well below their respective 200-day moving averages for the second month in a row.

To some extent, investment-grade fixed income benefited from the global uncertainty during the quarter, but even here there was significant volatility. Investors fled to safe assets like fixed income, driving down interest rates. Rates were reduced even further by the Federal Reserve’s (Fed’s) March decision to effectively cut the federal funds rate to zero. As a result, the 10-year Treasury note dropped from 1.88 percent at the start of the year to 0.70 percent at the end of the quarter.

The sudden decline in rates disrupted financial markets. This led investors to flee to cash, which sent fixed income prices down, although they had largely recovered by month-end. The Bloomberg Barclays U.S. Aggregate Bond Index fell by 0.59 percent during the month, but it gained 3.15 percent during the quarter. High-yield fixed income, which tends to be more closely correlated with equities than with interest rates, fell by 11.46 percent for the month, contributing to a 12.68 percent decline for the quarter.

Coronavirus’s impact on American workers
Concerns about the coronavirus pandemic roiled markets in March, as the world came to grips with the severity of the situation. Mandatory shutdowns of schools, restaurants, sporting events, and most nonessential businesses drove home the real-world impact the coronavirus is having on daily life.

The social impact was immediate, but the economic effects only got started during March. The first data release to reflect the damage was the weekly initial jobless claims report for the week ending March 21. As you can see in Figure 1, 3.283 million Americans filed for unemployment. This was the highest weekly total of all time, well above the 665,000 we saw in March 2009 at the height of the financial crisis. This economic shock is what drove investors out of stocks and toward safer assets. With the social lockdown measures also shutting down large parts of the economy, it is almost impossible to tell what the full extent of the damage will be.

Figure 1. Weekly Initial Jobless Claims, 2005–Present

chart
Source: Bloomberg

Fortunately, both the Fed and the federal government have stepped in to help keep the economy alive until it can restart. The Fed cut rates to zero and started a new round of quantitative easing, while the federal government put a $2 trillion stimulus plan in place to support worker incomes and small businesses.

This coordinated fiscal and monetary stimulus should help support the economy through the period of large-scale social distancing. In addition, another stimulus bill is already underway that would provide relief for states and individuals, as well as targeted support for the mortgage and travel industries.

The policy response to the coronavirus crisis in March is unprecedented in both magnitude and speed. The pandemic and the economic shutdown are damaging and will likely result in a recession. But the supporting measures, both current and pending, should keep the economy on life support until the country opens again. The financial markets seem to agree with this take, as the policy actions led to a partial recovery toward the end of the month.

The end of the beginning?
Although conditions remain difficult, there is some positive news as well. Here in the U.S., we have the benefit of watching how other countries have dealt with outbreaks. In places like South Korea and China, we have seen the positive impact enhanced testing and strict social distancing practices can have on slowing the spread of the virus and flattening the curve. We know what has to be done and are doing it across the country—and there is reason to believe it is working.

A good sign is that the number of new cases in the U.S. is growing more slowly. According to Worldometer, the growth rate has dropped by half. As we have seen in other countries, the decline in the growth rate of new cases is a necessary first step to stopping the spread. We are still far from containing the coronavirus outbreak in the U.S., but at least there is evidence that we are on the right track.

Financial markets are also staging a partial recovery, suggesting that the worst of that reaction may be behind us. While there will certainly be volatility—and markets may well drop again—we’re seeing signs that much of the panic has passed, and markets are now reflecting a balance of hope and fear.

Risks are here to stay
As we saw throughout the month and quarter, risks to economic growth and markets can spring up at any time and from anywhere. Given the nature of the coronavirus, we will see rising case numbers and deaths in the upcoming weeks. The economic updates will be grim as well. And looking forward, there is still a lot of uncertainty about the measures taken to combat the virus, which will likely drive further volatility.

There are very real reasons for hope, however, with signs that containment measures are having a positive effect domestically. The coordinated response from the federal government is also a positive for the economy and markets in these trying times. And with the large declines we’ve seen so far this year, markets are now pricing in a much broader pandemic and a tremendous amount of economic damage—things that may not materialize.

The economy and markets are now driven by reactions to the spread of the coronavirus and the government’s policy response. Although there are indeed signs of improvement, current conditions remain challenging and are likely to get worse before they get better. As investors, we need to remain focused on the long term. The coronavirus crisis is just the latest in a long line of events that will ultimately be overcome, but it is impossible to know how and when. Given that, and the volatile times we are in, maintaining a well-diversified portfolio that matches your goals and time horizon remains the best path forward.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.


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Market Update for the Month Ending February 29, 2020

A turbulent February for markets
February was a tough month for markets, ending in a terrible final week—the worst week for U.S. equity market returns since 2008. Investors were spooked by news about the spread of the coronavirus and fled to safe-haven assets. The S&P 500 fell by 8.23 percent, the Dow Jones Industrial Average (DJIA) dropped by 9.75 percent, and the Nasdaq Composite lost 6.27 percent.

This sell-off came despite positive fundamentals, with fourth-quarter earnings for the S&P 500 continuing to come in above expectations. Per Bloomberg Intelligence, as of February 20, the blended average earnings growth rate for the S&P 500 stands at 1.3 percent for the fourth quarter, with 86 percent of companies reporting. This is a solid improvement from initial estimates of a 1.2 percent decline. If this growth rate holds, it would represent the first quarter with year-over-year earnings growth since the fourth quarter of 2018. While prices can diverge from fundamentals over the short term, fundamentals drive growth in the long term. So, this return to growth is a positive development for markets.

Technicals were far less supportive for U.S. equities during the month. Both the S&P 500 and DJIA ended below their respective 200-day moving averages. The Nasdaq Composite was the only major equity index that finished above its trendline. It traded below this level on the final trading day of the month, however, before recovering and finishing above trend. This is an important technical signal, as prolonged breaks below this trendline could indicate a longer-term shift in investor sentiment.

The story was much the same internationally, with the MSCI EAFE Index falling by 9.04 percent for the month and emerging markets declining by 5.27 percent, both due to coronavirus concerns. Technicals were a headwind for international markets, with both indices finishing below their respective 200-day moving averages.

The major beneficiary from the risk-off sentiment was investment-grade fixed income. Investors sold out of riskier asset classes and flocked to the relative safety of bonds. Yields fell sharply, as shown by movements in the 10-year Treasury yield, which started February at 1.54 percent and finished at 1.13 percent. Falling yields drove the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.80 percent.

High-yield fixed income, which tends to be more closely correlated with equities than with interest rates, did not fare as well. The Bloomberg Barclays U.S. Corporate High Yield Index was positive for much of the month. But the risk-off sentiment that pervaded markets hit high-yield bonds near month-end, causing a decline of 1.41 percent. Investors demanded more yield to compensate for perceived higher levels of risk. As a result, credit spreads for high-yield bonds widened to levels last seen in June 2019.

Putting volatility in perspective
Concerns about the spread of the coronavirus were the major driver of market volatility in February. In January, investors were focused largely on the spread of the disease in China and the steps governments around the world were taking to contain it. But in February, news that the virus had spread throughout much of the world spurred fears of a pandemic. Reports of untraceable cases and the first death from the virus in the U.S. drove this point home for Americans.

Market reactions to this larger-scale problem were severe, as was the case with previous epidemics, such as Ebola, Zika, and SARS. In that sense, while the risks are real, we have seen this movie before. There’s certainly no guarantee things will play out as they have in the past. But with each of these epidemics, we saw short-term volatility followed by quick recovery once the disease was contained. Data from China and other countries around the world shows that, so far, the spread of the coronavirus is moderating. So, it is not unreasonable to expect a similar market recovery once more progress is made.

Economic updates positive, despite coronavirus threat
While investor attention was dominated by the sell-off at month-end, many of the economic updates released during the month showed signs of an improving economy. February’s consumer confidence reports were encouraging, with both major measures of consumer sentiment increasing to multi-month highs. The University of Michigan consumer sentiment survey was especially encouraging. It included survey responses from consumers through February 25, when markets were experiencing the virus-related sell-off. So far, consumer sentiment has remained resilient despite the spread of the virus. We will be monitoring this closely, however, given the close relationship between consumer confidence and spending.

Speaking of spending, consumer spending data released during the month was solid as well. Headline retail sales grew 0.3 percent in January, marking the fourth straight month of headline sales growth. Housing sales were also impressive, with existing home sales up nearly 10 percent year-over-year. New home sales were even more notable, increasing by 7.9 percent. This brought the pace of new home sales up to its highest monthly level since 2007, as you can see in Figure 1. Overall, February’s data releases showed the American consumer was very active to start the year.

Figure 1. New Home Sales, 2007–Present

chart

Businesses also showed improving confidence and spending figures. Both manufacturer and nonmanufacturer confidence increased by more than expected in January. Durable goods orders came in better than expected for both December and January. Core durable goods orders, which are a proxy for business investment, increased for the third straight month. This indicates the slowdown we saw in business investment throughout much of 2019 may be reversing. Although they could be at risk going forward, these positive economic fundamentals provide a substantial cushion for any economic damage from the virus.

Fundamentals vs. risks
Despite the strong fundamentals we saw during the month, risks remain, and more volatility is likely. Previous epidemics have had minimal long-term effects on markets, but there is no guarantee this outbreak will follow the same pattern.

That said, markets are now pricing in quite a bit of risk, and there is potential for good news to lead to a market rally. We’ve already seen some evidence of this in China, where reports of a slowdown in new cases led to a partial recovery in equity markets at month-end. In the U.S., fundamentals and spending are strong. So, we can still expect economic growth to continue in 2020. There is also the potential for market support from global central banks. They are monitoring the spread of the virus carefully and will be ready to step in with supportive monetary policy if necessary.

Ultimately, the major risk to the economy is the potential for a sharp drop in confidence in the face of the negative headlines. We will be watching this going forward. Given the likelihood of further short-term volatility, February’s results remind us of the importance of constructing portfolios that can withstand volatility. As always, a well-diversified portfolio that matches investor goals and time horizons remains the best path forward.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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