More Stimulus on the Way

In a little more than a month, we saw the swiftest descent into a bear market in the S&P 500’s 63-year history and a remarkable liquidity crunch in bond markets that triggered a spike in yields, even for the highest-quality municipal bonds. And last week, it was oil’s turn to make history, closing at its lowest price ever recorded.

At the close of trading Monday, the contract for a barrel of West Texas Intermediate crude to be delivered in May closed at negative $37.63 — a price that implied sellers were paying buyers to take barrels off their hands. Indeed, the world is running short on places to store oil, as a surge in production coincided with plummeting demand (oil prices did recover a bit as the week progressed).

Whether it’s equities, municipal bonds or oil; it bears repeating: Take every forecast right now about the economy, or a particular asset class, with a grain of salt. No economic model forecast a pandemic and negative oil contract prices in 2020. And no economic model is going to predict how our collective behaviors shift after this, perhaps permanently. History shows, time and again, the economy bounces back from a recession, but each one leaves a lasting imprint.

That’s why it’s so important to maintain your long-term investing mindset, with a principled approach to risk management and diversification.  

WALL STREET WRAP

Lawmakers Pass Virus Relief Bill 3.5: Legislation passed last week means more stimulus is on the way. The measure would provide $484 billion to replenish funds in a small business lending program and provide aid for hospitals treating COVID-19 patients. There's also a fresh $320 billion for the Paycheck Protection Program, which was so widely utilized that it ran out of funds in a little more than a week. Lawmakers have signaled this was an interim bill and an “official” fourth round of aid is forthcoming, though it likely won’t be approved until May.

Rolling out stimulus has been a bumpy ride at times. The smallest businesses were blocked out of the first round of PPP funds by bigger businesses (some have since returned the money). Some Americans are having trouble getting their stimulus checks and unemployment benefits. Still, overall, we think policymakers are acting swiftly and that’s prevented the worst-case scenario from occurring. And at some point, the process should improve. For instance, this round of funding earmarks $60 billion in PPP funds for small and midsize community banks to lend to local businesses — a direct response to criticism aimed at the first round.

Some States Reopen, More Could Follow: Last week states such as Oklahoma, South Carolina and Georgia began loosening restrictions on select businesses, while a host of other states are ramping up their own timetables. Governors around the country are taking different approaches to reopening, though public health officials are pushing state leaders to heed federal guidelines on the process.

Even with the green light to open, various businesses large and small said they would likely remain closed for now.

A World of Hurt: We have known economic data would be bad, and it is. Manufacturing and service PMIs in the U.S., Eurozone and Japan all reflected the steepest, swiftest decline in business activity ever recorded in April in their respective regions. Across the board, services-oriented companies like restaurants and hotels were stung most by lockdowns and emergency health measures to limit the spread of coronavirus. But even businesses fully operating noted steep declines in demand, while suppliers cut costs to keep customers. Confidence in the outlook for future output has hit a new low, as businesses place hope on the gradual easing of containment measures.

In the U.S., the IHS Markit Flash U.S. Composite PMI Output Index hit 27.4 in April, down from 40.9 in March (a reading below 50 indicates worsening conditions). In the Eurozone, the same flash composite gauge fell to 13.5 from 29.7.

EU Roughs Out a Trillion-Euro Emergency Fund: The 27-nation bloc has agreed to begin drawing up plans for what could amount to a 1 trillion-euro fund to help pull the countries out of a recession. The EU had endorsed a 540 billion-euro stopgap measure in the immediate fallout from the coronavirus, but this package would aim to support a longer-term recovery. Details are still forthcoming, as there’s been disagreement on whether the funds should take the form of loans or grants. Those structural details are still being sorted out, and leaders have tasked the European Commission to craft a proposal by May 6.

WEEK AHEAD

Earnings from Consumer Giants This Week: This week, analysts will be busy parsing earnings from some of the biggest consumer companies in the country, as Starbucks, Facebook, Microsoft, Visa and Amazon are all set to report. CEO discussion around earnings could give unique perspective into the crisis, as many of these companies are the beneficiaries of shifts in consumer and business behaviors — working from home, buying this online, paying for things digitally, etc.

Numbers to Watch: Last week, another 4.4 million Americans filed unemployment claims, bringing the total to 26.5 million initial claims filed since March 14. Weekly jobless claims will again be in focus this week, along with reads on consumer confidence, GDP, income, spending and inflation.

Updates from the Fed: The Federal Reserve will hold its regularly scheduled policy meeting this week, which means we’ll hear from Chairman Jerome Powell Wednesday afternoon. Powell’s comments about economic conditions always grab the market’s attention, but the spotlight is a little brighter during a crisis.

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