STA Weekly Report – Market Update in The Age of COVID-19
Written by Luke Patterson | Friday, May 15th, 2020
INSIDE THIS EDITION: Market Update in The Age of COVID-19 Weekly Global Asset Class Performance Coronavirus / COVID-19 Resource Center
Based on what we are seeing, there continues to be a reason to remain cautious, and possibly more so than a few weeks ago. After a strong market rebound, we are seeing signs that investor sentiment may be inflecting bearishly at a time when economic data continues to show breathtaking weakness.
We believe at this time the environment remains too uncertain to be too bullish or too bearish. Instead, we continue to believe investors should balance risk and defense in portfolios.
In the US, some of the hardest hit states, like New York and New Jersey, are seeing reported infections drop. This is a promising development as the number of new reported cases in the US slows. However, investors should remain watchful of a second wave of infection that health officials have cited as a big risk, especially as states begin to re-open their economies.
That is part of the reason we are watching what happens in states like Texas. Here, we are noting a worrying increase in new cases that coincides with the re-opening of the state’s economy. This is important because we believe what happens here could be a harbinger of what awaits the rest of the country as lockdown restrictions are eased.
Globally, new COVID-19 cases continue rising, driven by growing infection rates in emerging markets like Russia, Mexico, and India. It is yet another sign that even though some domestic economies are beginning to reopen, the pandemic remains very much with us.
Also remaining with us are the economic impacts that COVID-19 has continued to unleash on the global economy. As we have done since the pandemic began, we have kept a close eye on high frequency data releases from the New York Federal Reserve Bank. We believe this is the best real-time barometer we have for keeping a pulse on the domestic economy as we navigate through this difficult time.
Without getting into the specific details of the data detailed in the chart above, the key takeaway is that economic data across sectors continues to highlight the massive economic deterioration that has occurred as a result of COVID-19.
We can look to retail numbers as just one example that shows how deep COVID-19 has hurt economic activity. In this week’s retail report, we saw that sales plunged a record 16.4% in April. This number was far worse than expected and the look-through on the data was brutal with clothing down 78.8%, electronic stores showing a sales decline of 60.6%, home furniture sales down 58.7%, and gas station sales numbers off 28.8%. The only bright spot was non-store retailers which showed an increase of 8.4%. These numbers are truly abysmal.
What has been interesting to us is that although we have seen real economic destruction over the last two months, stock market sentiment improved along with stock market returns, as investors seemingly looked past immediate economic and earnings concerns and instead focused their attention on an expected recovery in 2021. It is entirely possible that the stock market run has gone too far much too soon, especially considering the magnitude of job losses that the economy will need to work through.
For investors, it is important to not succumb to fear of missing out that can at times betray investors. Instead, we urge a data-driven approach to decision-making. What the data is signaling is that the market rally off the lows maybe meeting some resistance as investor sentiment may be in the process of lining up with the economic reality. If the move is bullish or bearish remains to be seen but we believe the downside risks outweigh the upside potential at this point, at least until we see more stimulus or meaningful progress on a COVID-19 treatment or vaccine.
At STA, we have noted that fixed income markets have seen a larger number of downgrades compared to upgrades recently. In fact, upgrades have been few and far between. Professional traders and retail investors are overwhelmingly bearish and the put/call ratio, a ratio that can be used to see the number of traders that are buying protection via put options, is also beginning to turn more bearish. Value stocks have continued to lag growth stocks and technical indicators are showing signs of weakening.
These conditions certainly lead investors to have to make difficult decisions – to deploy or not deploy capital. Especially as the risk/reward relationship for stocks is more difficult to identify like we have today.
We believe going forward investor demand will continue increasing for strong balance sheet companies that are likely to weather, and thrive, in the current environment. The reality is that when economic conditions worsen, investors don’t want to own highly leveraged companies with weak balance sheets because leverage and limited balance sheet flexibility can threaten their survival during the downturn. While we don’t know exactly how this economic downturn plays out in the end, what we do know is that investors must be prepared to adjust their allocations and exposures for all outcomes.
Weekly Global Asset Class Performance
Over the last several weeks, the team at STA Wealth has attempted to keep our clients apprised of updates related to the markets, economy, government, tax, retirement, and other changes impacting us during this difficult time. As the Coronavirus (COVID-19) pandemic continues to spread, its impact on businesses and individuals has been significant. Stay up-to-date on the latest news with this Coronavirus Resource Center as your go-to resource for commentary, news, and other resources. Bookmark this article to check back regularly for updates.
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