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Market Commentary: Week of April 20, 2020


market-commentary-week-of-april-20-bodyWhat happened?

It was a strange week, in our opinion. Economic news was grim as another 5 million Americans filed for unemployment insurance leading the way, bringing the 1-month total to over 22 million. First-quarter earnings releases had very few—if any—bright spots as our largest banks significantly raised their loan loss reserves and predicted a deep recession as part of their future earnings outlooks. Meanwhile, the “Grand Bargain” to save oil producers through production cuts failed miserably as the demand side pushed WTI crude down to its lowest level since 2001. Corporate bonds, investment-grade, and high-yield both widened a decent amount after the prior weeks’ furious Fed-driven rally. Nevertheless, stocks were up strong on the week! The S&P 500 is now only 15% off of its all-time high of 3,386—a high that was set just 2 months ago. Surprisingly good, considering most prognosticators expect the economy to contract as much as 40% (annualized) in the second quarter. FORTY PERCENT!

  • The S&P 500 was up 3% for the week. The average daily move for the week was 1.9%

  • The NASDAQ was up 6% for the week. The average daily move for the week was 1.8%

  • The 2-year Treasury declined 2 basis points, closing at .205% on Friday. On Wednesday, the 2-year closed at .199 basis points, the lowest yield since 2013

  • The 10-year Treasury decreased 8 basis points, closing at .64% on Friday

  • The VIX Index decreased by 8.4% closing at 38.15 Friday. For perspective, the VIX was 82.69 March 16

  • The MOVE Index decreased 6.1%, closing at 69.89 Friday. For perspective, the MOVE was at 163.7 March 9

  • 5-year Investment-Grade Corporates (as measured by Markit CDX) widened 5.1 basis points, closing at 86.96 basis points on Friday (it closed 151.7 on March 20). High-yield corporate debt (as measured by Markit CDX) widened 54 basis points, closing at 588 basis points (it closed 871 March 23).

  • S. Dollar Index was flat, closing at 99.78 on Friday

  • WTI Crude was down 19%, closing at 18.27 Friday—its lowest close since 2001

What’s going to happen?

To repeat last week’s post, the markets will be battling the forces of “good” (Federal Reserve and U.S. Treasury lending and investment) and “evil” (COVID-19 casualties, business failure, and unemployment) for the foreseeable future as the economy remains closed. The President laid out basic guidelines for a 3-phase approach to reopening the economy. However, many state governors are grappling the very real fear that without robust testing, all lifting lockdown orders will do is undo all the hard-fought battle they and their medical infrastructure have gone through to flatten the trajectory of cases and deaths. Most governors still report a lack of robust testing and PPE supplies. Protests have begun to reopen the economy and miles-long lines for food are appearing throughout the country. You cannot put people out of work and businesses out of business without giving them something more than a $1,200 check and a relatively tiny Main Street Lending program (that the great majority of small businesses did not get) and not expect things to unravel. This is not a normal business cycle recession or even a replay of The Great Recession; the Fed’s expanded 2008—2009 playbook is not putting food on the table. Stocks have not factored that in yet.

 

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

  • The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.

  • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

  • >The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

  • The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.

  • The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.

  • The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.

  • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.

  • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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