Last week, the market started strong but ended weak as encouraging news about the fight against COVID-19 was off-set by weak economic news and potential retaliatory measures by the White House in disagreement with China over China’s handling of the virus. Despite last-day weakness, the S&P recorded the strongest one-month return since 1987. The S&P 500 gained 12.82% (10.09% CDN), the TSX was up 10.79%, and the EAFE advanced 3.89% in domestic terms (6.46% CDN). Small-caps and mid-caps outperformed during the week. Energy enjoyed a rebound as country and state re-opening strategies showed promise of recovering consumption.
Positive news on the slowing infection and death rates signaled to leadership that the time had arrived for discussions on re-opening economies. Universally, re-opening strategies are expected to be phased in over timelines based on regional priorities. There were encouraging reports from an Oxford University team that a vaccine could be available as early as September. Gilead Sciences also reported that Remdesivir had performed well in reducing the severity of the coronavirus in a large trial. These reports supported the notion that while we are not out of the woods quite yet, there is light at the end of the tunnel.
While optimism over the positive news on COVID-19 gave some relief to investors, the economic impact of lockdowns continued to take its toll. The US economy contracted 4.8%, annualized, in Q1 with expectations for Q2 to bear the brunt of the lockdowns. The Congressional Budget Office (CBO) second-quarter forecast expects a contraction of 40% annualized. Further, the CBO is forecasting unemployment to top 14% in Q2. Last week, 3.8 million additional workers applied for unemployment benefits bringing the total since the beginning of the crisis to 30.3 million or approximately 18% of the US working population. Personal spending fell off a cliff dropping 7.5% as incomes fell to levels lower than expected. GDP numbers in the Eurozone contracted 3.8%, annualized, with Spanish and French contractions worse than expected at 5.2% and 5.8%, respectively.
About one-third of the companies have reported reduced earnings with little or no guidance for the remainder of the year. Markets rallied not on 2020 fundamentals but in anticipation of economic normalization and recovery in 2021. To provide additional liquidity, the US Fed announced it was expanding the eligibility criteria for cities with populations of 250,000 and counties with populations of at least 500,000 to participate in its municipal lending facility. The ECB also announced plans to buy more than 1 trillion Euros of bonds to support bond markets and announced plans for expanding its lending through targeted long-term refinancing with up to 1% negative rate loans starting in June. It also announced non-targeted pandemic emergency long-term refinancing of rates up to a negative .25% starting in May.
News this weekend that Warren Buffett sold all his airline stocks could signal a challenging week ahead. To expect the markets to continue moving higher without an occasional pull-back, we think, is unrealistic. We have suggested a pull-back to retest the previous lows would not be out of the question based on the severity and continuation of the lockdown. It appears that a resumption of regular economic activity may take longer than initially thought as fear of a second wave of the virus could further delay the return of consumer habits.
Again, continue to remain cautious and patient.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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