May 20, 2020
May 20, 2020
- With a V-shaped recovery increasingly unlikely, investors are exercising caution as longer-term game plans emerge from governments and health officials monitor a potential second wave of outbreaks.
- Manufacturing remains stressed as supply chains recalibrate and investors recognize there will be no quick rebound.
- Stability is relative in a crisis environment, but technology stocks appear to be the sector keeping the S&P 500 above water and foreign exchange rates are also less volatile.
One Big Takeaway
The enormous market drop in late February and March, followed by April’s V-shaped rebound, is now pivoting into a sideways move: consolidation.
Investors are making their moves within a relatively tight range — very few big bets on any sector, asset class, or individual company — as the coronavirus wreckage and post-pandemic trends come into focus. A second wave of cases in stabilized countries remains a very real possibility, fueling additional caution. The dynamic environment created by the pandemic is another reason to stick with contained side-to-side adjustments: most traditional economic data is backward-looking. Unemployment numbers, for instance, reflect the previous week or month which, in a fast-moving unprecedented crisis, is less predictive than in a more stable moment.
There are also external factors tied to the pandemic shaping this consolidation — for one thing, the ongoing tension between China and the U.S. does not help to calm investors’ nerves. The oil markets are also seeking security amid the search for a sustainable solution to the storage problem. In the short-term, investor sentiment may be boosted by the uptick in demand reported by Russia and Saudi Arabia. However, the 10% cut in production that oil companies agreed to at the end of April is not enough to counter the more than 30% drop in demand since the shutdown of economic activity around the world.
Chart of the Week
The recovery bump in the stock market last month would lead most investors to believe that global economic activity would take a similar path to recovery. But that seems increasingly unlikely — and bond market yields support that skepticism. Bond yields drop when economic activity weakens, and rise in anticipation of hikes to control inflation when the economy is growing.
India’s pandemic drop in economic activity makes a recovery before 2020 highly unlikely; current data on the country’s purchasing index suggests a full-year contraction, even if there is an upturn in the latter two quarters. The resulting recession is dispiriting for both the population and its leaders after India’s positive growth in 2019. In the longer-term, however, India may be able to reinvent itself as a supply chain anchor. The Prime Minister’s new $265 billion aid package includes investments and reforms in land and labor markets designed to attract manufacturers whose supply chains in other parts of Southeast Asia have been disrupted by the coronavirus. The short-term prospects are difficult, but a sustainable longer-term recovery is possible.
Within the ongoing market contraction in response to the pandemic — and as lockdown measures look likely to remain in place through the summer — European businesses are pinned between a 15% dive in investments and a 26% increase in demand for working capital. Though the economies in the Eurozone are not recovering in unison, the gap is particularly pronounced for investment products rather than consumer goods manufacturing. How and when capital is able to meet credit demands and drive investor interest will shape the continent’s overall rebound.
Data to Watch
- The U.S. consumer price index is dropping as consumers remain increasingly anxious about the extended quarantine period and lack of national strategy. The main drivers of the drop are gas prices, apparel, and airline fares — but the numbers released in April reflect March, so a deeper dip in May’s announcement is likely.
- Though the Bank of England’s meeting last week did not lead to any announcement of new quantitative easing measures, the bank’s president indicated that new programs could be on the way if unemployment remains high.