Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy, and the global financial markets.
Relative to the historic second half of March, markets appeared comparatively calm throughout April. Alongside that reduction in volatility was a very strong comeback in markets across the risk spectrum, with US equities generally leading the way. The tidal wave of COVID-19 infections that started in China continues to roll through the US and other countries while an undercurrent of optimism is helping to buoy the markets. Uncertainties around re-starting economic engines and rising geopolitical concerns leave investors feeling more cautious as valuations have advanced.
The Federal Open Market Committee (FOMC) met in April but did not make any change to policy rates. Chairman Powell reiterated the commitment to supporting the stability of the economy in whatever ways possible. He indicated the FOMC would be in no hurry to withdraw the asset purchase program or increase interest rates that remain at the effective lower bound (0.00% to 0.25%). The balance sheet of the Fed grew by $1.4 trillion in April to $6.7 trillion.
The first estimate of 1Q-20 real GDP indicated a contraction of -4.8% annualized, due primarily to a -7.6% drop in personal consumption. Analysts expect a more dramatic drop for the second quarter, with estimates ranging from -10% to -40% annualized. Global GDP forecasts for 2020 are now generally in negative territory, with growth of equal or greater magnitude expected to materialize in 2021.
More than 32 million US workers have filed initial unemployment claims since mid-March. Accordingly, the government’s surveys indicate that 20.5 million jobs were lost in April, and the official unemployment rate more than tripled to 14.7%. The 2.5% decline in the labor participation rate kept the unemployment rate from moving even higher. A key factor for consumption will be understanding how many of these losses are temporary as opposed to jobs that will not soon come back. Inflation expectations were relatively stable during the month but rose slightly across the curve. Core CPI is up 2.1% year-over-year, while the FOMC’s preferred measure, Core PCE, edged down to 1.7% year-over-year through March.
Returns for all major equity sectors and indices came roaring back in April amid optimism that the worst of COVID-19 had passed. The S&P 500, which represents large US-based entities, started to recover from March’s drop with a +12.8% return. Energy (+29.7%) and Consumer Discretionary (+20.5%) led the way with Materials (+15.3%), IT (+13.7%), Communication Services (+13.5%), and Health Care (+12.5%) also posting double-digit gains. Utilities (+3.2%) and Consumer Staples (+6.6%) were the relative laggards. Small cap stocks, as represented by the Russell 2000, came back strongly, at +13.7%, also a good start to recovering from the March dive. Among the sectors, Energy (+37.6%) and Consumer Discretionary (+27.0%) led the way after cratering the month before. Utilities were the only negative performer, just slightly in the red at -0.1%. Across the market capitalization spectrum, Value underperformed Growth.
In the broad international developed markets, the MSCI EAFE index rose +6.5% as nearly every sector and country participated in the rally. Led by Materials (+9.6%), IT (+9.2%), Health Care (+8.8%), and Consumer Discretionary (+8.6%), there was broad support for the markets, with Energy (-0.9%) remaining a notable laggard. Australia (+15.3%) and Germany (+9.8%) did very well during the month, with most other countries in the 5% to 8% range. Spain (+1.5%) and Italy (+1.9%) were relative underperformers.
Emerging market stocks, as represented by the MSCI Emerging Markets index, outperformed their developed market counterparts at +9.2%. India was up +16.1%, and many others were in double-digits as well. Brazil continued to lag at +5.4%, although this represented a notable turnaround story after dropping nearly 40% last month.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, recovered somewhat in April with a return of +7.1% despite structural headwinds. The energy-related Alerian MLP index improved more significantly and rocketed upward by +49.6%. That said, the near-month NYMEX oil contract was down again in April at -8.0% and is now off by -69.2% year-to-date. Gold extended its 2020 rally, adding +7.0% for the month. The diversified Bloomberg Commodity index was down slightly at -1.5% for the month as broad-based demand for most commodities is still uncertain.
US Treasury (UST) yields held relatively steady across the board in April, failing to confirm the optimism that boosted risk assets. The effect of the Fed’s expanded asset purchase capabilities cannot be ignored, as approximately $1.5 trillion worth of outstanding UST supply has been brought onto the balance sheet since mid-March. Given this backdrop, the overall UST complex continued to perform and pushed year-to-date returns to an impressive +8.9%. The government yield curve steepened modestly, with the benchmark 10-year UST yield settling at a new month-end low of 0.64%. As sovereign yields outside of the US trended lower, the global stock of negative yielding debt expanded back to $12.0 trillion.
The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on both an absolute and duration-matched basis as credit spreads recovered materially. With a gain of 1.8% in April, the benchmark’s trailing 12-month performance of +10.8% has been astonishing given prevailing yield levels. Despite record-setting new issuance, IG corporates have been well supported by the Fed’s announced intent to embark on both primary and secondary market purchases. Corporate spreads improved by 70 bps for the month, with BBB-rated issues recovering most dramatically. As tighter spreads across categories combined with stable UST yields, the benchmark’s yield-to-worst tumbled to just 1.31%.
The BloomBar 1-15-Year Municipal index struggled again in April, with the return of -0.7% trailing anything of similar quality. Despite the Fed’s new Municipal Liquidity Facility, tax-exempt yields moved higher given uncertainly about fiscal policy support. Lower-rated and longer-dated issues underperformed as Municipal/UST ratios remain at historically cheap levels.
The BloomBar US Corporate High Yield index returned +4.5% for the month, directionally consistent with higher-risk equities. Benchmark spreads were 136 bps tighter on average, although the credit curve remains steep. All-in yields have fallen back to 8.1%, even as default rates pushed ahead of the long-term average. Bank loans had their best monthly return since July 2009, and emerging market bonds produced solid returns as investors sought enhanced income.
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.
Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.
Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.