Stone's Weekly Market Guide - Week of June 1, 2020
Updated: Jun 7
Chart of the Week: April economic data was dismal with much of the world on lockdown to fight the spread of COVID-19 during the period. May data is reflecting the beginning of the restarting of economies with meager economic activity but at levels “less bad” than April. There is much uncertainty about the path and strength of the economic recovery, so our U.S. Reopening Monitor tracks some non-traditional and high frequency healthcare, economic and financial market data to judge the robustness of the recovery in real-time with markets likely volatile during adjustments to the outlook (see table). For example, the OpenTable Diners information measures the year-over-year percentage change in U.S. seated diners. The data marked in green indicates that the measurement improved on a week-over-week basis, while red reflects deterioration. Another way to visualize the data is to look at the number of factors in the monitor improving or deteriorating on a week-over-week basis. The worst net reading (improving minus deteriorating) was two weeks before the S&P 500 bottomed which also shows the benefit of the financial market group because they turned higher before the economic and healthcare data (see chart). The full dataset and more details about the components of the monitor are available in our Guide to the U.S. Reopening Monitor. This proprietary monitor will be updated on a weekly basis and posted to our website.
Week in Preview
· Geopolitical: Deterioration in the relationship between the U.S. and China will be watched and has added another risk to the economic outlook with President Trump announcing unspecified future actions in response to China’s crackdown on Hong Kong. Unrest is happening across many U.S. cities, which could further complicate the economic reopening.
· U.S.: A busy calendar of releases but the main event will be the May payrolls report on Friday. The jobs report will be a relative improvement over April with the pace of job losses declining, but it will still make for gruesome reading with the unemployment rate likely to push the 20% level. April real personal income last week illustrated the level of support provided by the CARES Act with the headline reading showing a 13.4% gain but stripping out government transfers revealed the underlying economic weakness of -6.3%. Due to the fragile economic position of many households, the savings rate skyrocketed to 33% which will be reflected in weak 2Q GDP due to the paradox of thrift. Please see our Chart of the Week and our weekly U.S. Reopening Monitor for timely readings on the economic situation.
· S&P 500 1Q Earnings Season: With 97% of companies reporting so far, 64% of companies have exceeded earnings estimates. The 1Q blended earning growth rate is unchanged from the previous week at -14.6% year-over-year (Y/Y). With 1Q earnings generally heavily trimmed by COVID-19, more attention is paid to forward guidance with 2020 earnings showing some stabilization at -21.1% Y/Y. 2Q earnings will be even worse than 1Q with consensus estimates fading last week to -43.1% Y/Y. The pace of declines in 2021 earnings estimates has slowed. Even judging future estimates is complicated with many companies removing earnings guidance due to the unknown depth and length of the shutdown related economic weakness. Only six S&P 500 companies are expected to report this week.
· Europe: The Eurozone April unemployment rate is expected to rise to 8.2%, while the German May unemployment rate should rise to 6.2%. The European Central Bank (ECB) meets and is almost certain to leave the policy rates unchanged but their economic outlook is likely to sour further so the amount of asset purchases via the Pandemic Emergency Purchase Programme (PEPP) could be increased. The U.K. negotiations with the European Union (E.U.) continue with the deadline for extending access to the E.U.’s single market looming on July 1.
· Asia: China’s May official manufacturing PMI reflects a rocky recovery at 50.6, still above the 50 level for growth but declining slightly for the second straight month and confirming the challenges facing the economic rebound. The Caixin version of China’s May Manufacturing PMI data improved at 50.7. April household spending for Japan should be poor at -12.8% Y/Y.
Central Banks: In addition to the ECB, the central banks of Australia and Canada meet with neither expected to change their policy rates.
Week in Review
· Stocks rose by 3.0% for the S&P 500 with all sectors higher on continued optimism about the reopening of the global economy. Financials (6.6%), industrials (6.0%) and real estate (5.8%) outperformed the S&P 500, while communication services (0.6%), energy (0.9%) and technology (1.4%) were the biggest laggards. WTI (6.7%) and Brent (0.6%) rose with MLPs (1.5%) and the energy sector (0.9%) underperforming. Small cap stocks underperformed the S&P 500 with the Russell 2000 up 2.8% but small cap value stocks were strong performers. The 10-year and 30-year U.S. Treasury yield were little changed at 0.65% and 1.41% respectively.
· High yield credit spreads narrowed reflecting increased risk appetite. AAA municipal bond yields as a percentage of Treasuries decreased, and municipal bonds outperformed. The negative revenue impacts of the economic lockdown on local governments and talk of state bankruptcy have driven municipal bond valuations to low levels relative to Treasuries. Allowing states to declare bankruptcy should remain an unlikely outcome with the heart of the issue really about the size and distribution of Federal government aid to the states.
· The U.S. dollar was weaker against both developed and emerging market currencies. Developed international stocks as measured by MSCI EAFE outperformed the S&P 500 returns in U.S. dollar terms (5.1%) and on a hedged-currency basis (3.9%). Emerging market stocks underperformed the S&P 500 with the non-hedged return of 2.8% for MSCI EM.
· The 10-2 yield curve was little changed at +49 basis points. Another curve measure of three-month yield six quarters forward minus the current three-month yield widened and closed the week at +3 basis points. The yield curve has historically provided an accurate forecast of future recessions when the difference in these measures turns negative, also known as inversion. Yield curves are one of the major indicators that we monitor to judge recession risk, but these inversions typically happen more than a year in advance of an economic recession and external shocks like the current coronavirus outbreak might not be accompanied by one. Stocks have historically had significant advances post-inversion.
I appeared on Money Life with Chuck Jaffe podcast. We covered tons of ground including the "less bad" economic data, growth versus value, and rising tensions with China. The interview can be listened to here.
The PDF version of Stone's Weekly Market Guide is linked here.
The Guide to the U.S. Reopening Monitor is linked here.