May 12, 2020

Monthly Market Summary – April 2020

During April, global equity and bond markets continued the rebound that began in late March and posted strong positive returns.  The rally was driven by the aggressive monetary and fiscal policy actions taken around the world intended to limit the negative impact of the economic shutdowns imposed to fight the spread of the COVID-19 virus.  News of enough improvement in the number of new COVID-19 cases to allow limited reopening of businesses and transportation in several countries and U.S. states provided an additional boost to the markets.  Most commodity sectors continued to decline due to supply and demand issues.

While equity and bond markets improved in April, economic data reports began to show the severity of the impact of the mandated business shutdowns and social restrictions.   For example, first quarter gross domestic product (GDP) was -4.8% in the U.S.,   -3.8% in the eurozone, and -6.8% in China.  The number of initial unemployment claims in the U.S. totaled 20 million in April.  The unemployment rate in India rose to 26%.  Personal spending in the U.S.  dropped 7.5%, the largest one-month decline since 1959.  Retail sales in the United Kingdom declined 5.8% from a year ago.  U.S. rail traffic was down 21% from a year ago.  The Federal Reserve Bank of Richmond’s survey of manufacturing activity declined to -53 in April from the March level of 2.  The April reading was the lowest ever for this index.  All three components of the index, shipping, new orders, and employment, showed declines.  The IHS Markit eurozone composite purchasing managers index reached an all-time low of 13.5 in April dropping from 29.7 in March and over 50 in February.

With the economic damage continuing, governments and central banks enacted additional stimulus measures during the month.  For example, Japan’s parliament passed a $240 billion plan that includes a payment of about $1,000 to every citizen in Japan.  The European Central Bank launched a program to provide three-year loans to banks at -1% and lowered interest rates on some existing loans.  The U.S. government passed a $434 billion relief package that includes increased spending for small business loans.

The major U.S. equity market indices rebounded sharply in April and posted large positive returns.  Mid-capitalization (cap) stocks were the performance leaders outperforming small-cap stocks that outperformed the large-cap stocks.  Growth stocks outperformed value stocks by a wide margin in each market cap category.  In a reversal from March, returns were positive for each of the 11 industry sectors in April.  Energy was by far the best performing sector in each market cap category even though oil prices were extremely volatile and dipped into negative territory for a brief period.  Other top performing sectors were consumer discretionary, healthcare, and materials.  The defensive utilities and consumer staples sectors along with the more cyclical industrials and financials sectors posted the weakest returns.

The U.S. equity indices outperformed both the MSCI EAFE index of developed international country equities and the MSCI Emerging Markets index (EM).  The EM index outperformed the EAFE index.  U.S. dollar based returns for both the EAFE and EM indices were higher than the local currency returns since various currencies appreciated against the dollar.  Just as in the U.S., growth stocks outperformed value stocks in both the EAFE and EM indices.  Sector returns varied.  In developed international markets, healthcare, information technology, and consumer discretionary stocks had the best returns while in emerging markets energy, materials, and industrials had the best returns.  In both the EAFE and EM indices, financials and consumer staples had the lowest returns.  On a geographical basis, countries hit hardest by the virus including Italy, Portugal, and Spain had the lowest, but positive, returns.  Among developed international countries, Australia, Canada, and New Zealand had the best returns.  Chile, Indonesia, and Taiwan had the best returns among emerging markets countries.

U.S. bond market sector returns were mostly positive in April.  The municipal bond index was the only major sector index to post a negative return.  The benchmark 10-year Treasury bond yield moved in a tight range during the month.  The 10-year Treasury bond yield was 0.64% at the end of April compared to 0.70% at the end of March.  Corporate bonds had the best returns as prices rebounded since liquidity issues faded after the Federal Reserve announced aggressive bond buying programs in March.

The Bloomberg Commodity index posted another negative return in April.  Returns were negative for each of the sub-indices we track except for the precious metals and industrial metals indices.  The petroleum sub-index had the worst return hurt by the drop in oil prices brought on by the severe inventory glut and lack of storage capacity.  The price of West Texas Intermediate crude dropped under $0 per barrel briefly during the month but rebounded to close the month at $18.84, which was lower than the $20.48 price at the end of March.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

Even though markets have recovered some of the steep declines experienced in March, the pandemic situation and the related impacts remain highly uncertain.  Companies are reporting first quarter earnings and reports have been mixed with some companies reporting better than expected revenue and earnings growth but many others reporting significant drops in revenue and earnings.  However, the markets seem to be looking past the current reports.  What second quarter reports will look like is uncertain and many companies are withdrawing their typical earnings guidance.  With mandated shutdowns and restrictions on activity still in place in one form or another in much of the world, it is likely markets could have additional periods of heightened volatility.  We continue to have a neutral view on growth relative to value preferring to have exposure to sectors where previous growth trends are largely intact or are likely to accelerate because of the pandemic impacts along with some exposure to cyclicality to participate when the economy improves.

We continue to recommend keeping at least a year of cash on hand to be in a position to ride out market volatility.  With bonds looking expensive with yields at historic lows, we favor equities over bonds.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging markets equities.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.  We recommend looking at opportunities to do tax loss harvesting and portfolio rebalancing.

The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions.  These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.