April 2020 Economic Dashboard

April was a historic month for the US economy, as the coronavirus continued to grind parts of the economy to a halt. 20 million Americans filed initial unemployment claims, benchmark oil prices went negative for a short period, and the 1st Quarter GDP report, released April 29th, showed a -4.8% contraction. Despite the flurry of bad news, the S&P 500 continued to rebound from March lows, rising 12.7% in April, ending 14.2% below the February all-time high.  Many have been quick to point out the divergence in economic conditions and stock market performance. At the risk of oversimplifying, this can largely be explained by a basic feature of purchasing securities: future value. Markets are forward- looking as investors weigh decisions on the future dividends, interest, or capital gains they expect to receive. The economic toll exacted by coronavirus was being “priced in” (anticipated) during the February-March selloff. The rebound is a signal of improving investor sentiment for the future.

So, what has fueled the positive shift in expectations despite all the negative news? On the coronavirus front, the curve has “flattened” in most states, leading many to announce reopening plans. Several new studies have yielded optimistic results including lower mortality rates via serology studies and remdesivir trials showing modest positive results as a treatment. On the policy front, the Federal Reserve has unleashed another $800 billion in liquidity on top of March’s $1.6 trillion. The Federal Reserve continues to employ an expanded toolbox featuring small business loans, municipal bond purchases, and primary corporate credit. Monetary action has coincided with Fiscal stimulus, as Congress passed a $2.2 trillion initial package in late March, followed by another $484 billion April.

The chart below shows the 25 quarters the US experienced negative GDP growth in the last 50 years. The blue bars represent the S&P 500 price return for the quarter immediately following negative GDP. 15 of the 25 quarters in which GDP contracted were followed by gains in the S&P 500 index*. The observation here is markets are forward-looking. Last quarter’s weak economic data does not mean this quarter’s stock performance will be weak as well.

-Jared J. Ruxer, M.S.

Post a Comment

Your email is kept private. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.