Market Update: April 8, 2020

Last Friday, the S&P 500 Index closed at 2489, 13.5% above its March 23 intraday low of 2192. Markets continue to find solid footing this week, closing Wednesday, April 8, at 2750. The market is now 25.5% off the bottom and back above the -20% level (the threshold commonly cited for a bear market) from its February 19 intraday high of 3393 (Figure 1). Importantly, market volatility, as measured by the VIX, continues to decline (Figure 2).

Figure 1. The market has exhibited a strong rebound since March 23, 2020, putting it back above the threshold for a bear market.

Source: FactSet

Figure 2. Volatility continues to decline, though there is still work to do.

Source: FactSet

Following are our takeaways from the last three market days and what this may mean going forward:

• The rally this week is directly related to the so-called “flattening of the curve.” As seen in Figures 3-5, respectively, the number of cases in the U.S., New York state, and New York City have flattened sharply. While initial declines in market volatility reflected investors getting used to deteriorating headlines, recent declines reflect an actual improvement in headlines. Markets tend to shoot first and ask questions later, and this applies on both the upside and the downside. To that end, although the daily numbers continue to rise, the daily percentage changes are not only declining, but are showing signs of peaking far earlier than previously forecast. As we’ve written in the past, things do not necessarily have to get better, merely worse at a slower rate, for capital markets to rebound. We have seen this in both equity markets and credit markets, though spreads remain elevated.

Figure 3. The curve is flattening sharply in the U.S.

Source: FactSet

Figure 4. The curve is flattening sharply in New York state.

Source: FactSet

Figure 5. The curve is flattening sharply in New York City.

Source: FactSet

• While the spread of coronavirus has not been (and will continue not to be) even throughout the country, New York City is a huge barometer owing to 1) it being Ground Zero for the U.S. pandemic, and 2) the city’s economic effects on the entire U.S. economy. As a result, the economic fallout will also likely experience disproportionate spread (the next hot areas look to be possibly Florida and Texas). This means that gauging the direct effects on the U.S. economy will be best done at geographic and industry levels.
• Meanwhile, the twin buoys of monetary policy and fiscal policy are robust. The Federal Reserve continues to be active in markets, supply more liquidity with additional facilities. At the same time, the Small Business Administration’s (SBA) Paycheck Protection Program was launched far faster than could reasonably be expected. With such speed comes hiccups and glitches, but the SBA and banks are working through them, and more loans are processed each day.
• The ongoing decline continues to parallel what we saw in 1987 (Figure 6). While it is impossible to know what will happen in the near term, there are good signs emerging. It is not so far-fetched to think that markets may indeed have bottomed. That said, there are still many uncertainties and data points to be had; as a result, it is by no means a given. We continue to assess all data and viewpoints to determine what will transpire.

Figure 6. The ongoing decline continues to parallel what we saw in 1987.

Source: FactSet

• Our models continue to tell us that equities are compelling relative to bonds. But because dividend cuts have begun (with many more inevitably forthcoming) and earnings globally are poised to decline precipitously, the relative value component of our models will bear watching more closely over the near term.
• In non-coronavirus news, Senator Bernie Sanders dropped out of the 2020 presidential race. This added to market optimism, as Senator Sanders’ policies were considered the most unfriendly for the market. His campaign suspension removes one more uncertainty.