Equity markets in April experienced their best monthly gains since 1987, as a swift rebound from the coronavirus-induced losses spoke to optimism amidst a rising tally of COVID-19 cases. The S&P 500, a widely followed barometer for US stock performance, gained +12.8% in April to recoup the majority of its March decline. The index is down -9.3% year-to-date through month-end. Overseas equities lagged slightly, with the MSCI ACWI ex-US index rallying +7.6% in April for a -17.6% YTD return.
Within fixed income, the Barclays US Aggregate Bond Index gained +1.8% in April as long-term interest rates continued to head toward historic lows. Credit markets responded favorably to the Fed’s pledge of an additional $2.3 trillion in loans to support the economy, reducing fears of default amongst investment grade issuers. In the commodity space, energy markets continued to grapple with the new reality of reduced demand in combination with heightened supply. The May futures contract for West Texas Intermediate crude oil traded in negative territory for the first time in history, touching a low of minus $37 per barrel on April 20th before returning to positive territory at the contract’s expiration. On the other hand, gold continued to rally, with spot prices climbing +5.8% on the month. A balanced portfolio, comprised of 60% in global equities and 40% in fixed income, would have gained +7.6% in April for a YTD return of -5.5%.
As always, we aim to interpret the vast array of economic and market data through our Three Dials methodology, helping to provide our clients with a steady anchor against the winds of this ever-changing situation. While data continues to emerge, below is a snapshot off where each of our primary indicators stand as of the end of the month:
Despite the sharp rally, all major equity indexes remain below their long-term support levels. Continued uncertainty around treatment and eradication of the virus will likely manifest itself in above-average market volatility in the coming months. While our base case remains that the market lows seen in March will hold, plenty of downside risk remains at current levels. Thus, our Momentum and Sentiment Dial remains in a “Negative” position for the time being.
The advance estimate of Q1 GDP shows that coronavirus shutdowns impacted US growth more quickly than anticipated, with the economy contracting by -4.8% in the first quarter. With roughly 30 million Americans having filed for unemployment since the start of the pandemic and the unemployment rate expected to push 15%, the global economy faces a long road to recovery. As such, our Economic Dial has moved into a “Negative” position.
April’s rally in stock prices in the face of deteriorating earnings indicates that, while stocks sit well below their all-time highs, valuations remain stretched by most metrics. There may yet come a day where stocks become a bargain purchase, but until then our Valuation Dial remains “Negative”.
Although the negative reading on our three of our dials indicates a defensive posture, we would stress that this does not mean that it is time to panic. We reiterate that the market lows may already have been established, but given the ample downside risk that remains, we find it prudent to apply a degree of caution going into the rest of the year. As always, having a plan and sticking to it wins out in the end, and Archetype’s asset allocation framework, built around our Three Dials philosophy, is built to help clients invest for the long haul in all market environments.
Sources:
https://coronavirus.jhu.edu/map.html
https://www.nytimes.com/2020/04/30/business/stock-market-today-coronavirus.html
https://www.bbc.com/news/business-52350082
https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-advance-estimate