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Virus Anxiety, Gloomy Data Pressure Stocks

The U.S. equity markets ended another bumpy week on a down note, posting the third weekly decline in four, as the heightened uncertainty surrounding the depth and duration of the COVID-19's economic and social impact continued to sap sentiment. The uneasiness came amid news that global cases breached the 1 million mark and the U.S. looks to be heading into rough waters. As well, a host of March economic data painted a downbeat picture, with nonfarm payrolls in the U.S. falling by a much larger-than-expected amount and likely understated after the severe spike in jobless claims that occurred at the end of March that approached the 10 million mark. Moreover, ISM's services sector report, tilted more toward larger companies, posted a decisive drop, but showed growth remained in expansion territory, while Markit's broader survey of companies varying in size registered the largest contraction on record. Treasury yields were lower as bond prices moved to the upside, the U.S. dollar gained ground, gold rose, and crude oil prices extended yesterday's surge on optimism of a potential thawing of the price war between Russia and Saudi Arabia. Europe finished out the week mostly lower and Asia was mixed, as the global markets absorbed a host of services sector reports that showed broad-based contractions.

The Dow Jones Industrial Average declined 361 points (1.7%) to 21,053, the S&P 500 Index shed 38 points (1.5%) to 2,489 and the Nasdaq Composite dropped 114 points (1.5%) to 7,373. In moderately heavy volume, 1.4 billion shares were traded on the NYSE and 3.3 billion shares changed hands on the NASDAQ. WTI crude oil jumped $3.02 to $28.34 per barrel and wholesale gasoline was up $0.03 at $0.69 per gallon. Elsewhere, the Bloomberg gold spot price was $7.33 higher to $1,621.32 per ounce, while the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.4% to 100.54. Markets were lower for the week, as the DJIA lost 2.7%, the S&P 500 fell 2.1% and the Nasdaq Composite declined 1.7%.

U.S. stocks were lower in choppy trading, scaling back yesterday's gains, despite crude oil prices extending a rally amid optimism that Russia and Saudi Arabia could end their price war on the heels of comments yesterday from President Donald Trump suggesting production cuts of up to 15 million barrels a day could be agreed to soon. The markets also eyed the flood of fiscal and monetary policy measures aimed at supporting the severe economic disruption and proper functioning of the key credit markets, with small business aid at the forefront as the unprecedented loan/grant program begins today to try to curb the spike in unemployment claims that we have seen tally almost 10 million in the past two weeks. Concerns are rising regarding the rollout of the program and the potential for the funds to quickly dry up, but Treasury Secretary Steven Mnuchin has pledged that if the loan program eats through the earmarked funds of the aid package, he will not hesitate to move quickly to ask Congress for more funding.

However, the markets remain at the mercy of the intensifying COVID-19 (coronavirus) pandemic, with global cases topping the 1 million mark and the U.S. currently the epicenter of the outbreak and likely heading through darker times before seeing some light at the end of the crisis tunnel. Uncertainty regarding the depth and duration of the extreme economic and social disruption continues to keep the markets skittish, with focus on whether the equity markets will test the March 23rd lows. Schwab's Chief Investment Strategist Liz Ann Sonders reminds investors that Panic is Not an Investment Strategy.

Also, the Schwab Center for Financial Research (SCFR) discusses in the article, How the U.S. Economic Stimulus Package May Affect Investors, with Schwab's Liz Ann Sonders noting that fiscal stimulus at this stage is really a rescue or triage mission but it is unlikely to actually stimulate growth, at least until the country is no longer shut down. Liz Ann adds that rather, it is meant to cushion the economic blow from the virus-containment policies, though it was important for the federal government to act quickly and decisively. She points out that the huge spending package will help, but it's hard to gauge its ultimate effectiveness when the severity of COVID-19's economic impact remains to be seen as discussed in her latest article, Triage: Throwing Everything at the Virus.

Furthermore, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his latest commentary, What Will The Recovery Look Like?, noting that this recession is the result of a shock, not the natural end result of a slow build-up of excesses. Jeff adds that this may mean the recession and bear market could be deeper, but also that the duration may be shorter. For timely news and analysis follow Schwab experts from the SCFR on Twitter at @SchwabResearch, and check out our Q&A With Schwab Experts on Recent Market Volatility.

Amid this backdrop, companies continue to hold off on providing 2020 guidance and travel and leisure stocks remain in the eye of the storm, notably the airline, hotel and resort, and restaurant industries, while the healthcare sector is racing to try to mitigate the virus impact through expedited detection, containment and treatment measures.

In specific equity news, Tesla Inc. (TSLA $480) gained ground after the electric vehicle maker announced stronger-than-expected Q1 deliveries, while Lennar Corporation (LEN $33) posted better-than-expected Q1 earnings and revenue results but suspended guidance and warned that it expects sales to continue to slow amid the coronavirus disruption. LEN traded lower.

March labor report shows job losses were much larger than expected

Nonfarm payrolls (chart) fell by 701,000 jobs month-over-month (m/m) in March, compared to the Bloomberg forecast of a 100,000 drop, and following February's upwardly-adjusted rise of 275,000. Excluding government hiring and firing, private sector payrolls dropped by 713,000, versus the forecasted decline of 132,000, after rising by a favorably-revised 242,000 in February.

The Department of Labor said the changes in these measures reflect the effects of the coronavirus and efforts to contain it as employment in leisure and hospitality fell by 459,000, mainly in food services and drinking places. The report also noted that declines also occurred in healthcare and social assistance, professional and business services, retail trade, and construction.

The labor force participation rate declined to 62.7% from February's 63.4% rate. The data, although posting a severe drop in employment, likely understates the downward impact as this report does not include the spike in layoff activity in the second half of the month as evidenced by the past two weeks of initial jobless claims that have totaled close to the 10 million mark.

The unemployment rate jumped to 4.4% from February's 3.5% rate, versus forecasts of a rise to 3.8%, while average hourly earnings were up 0.4% m/m, above projections of a 0.2% gain and compared to February's unrevised 0.3% rise. Year-over-year (y/y), wage gains were 3.1% higher, above estimates of a 3.0% increase. Finally, average weekly hours dipped to 34.2 from February's 34.4, and versus forecasts of a decline to 34.1.

The March Institute for Supply Management(ISM) non-Manufacturing Index (chart) fell to 52.5 from February's 57.3, and versus forecasts of a drop to 43.0, with a reading above 50 denoting expansion. The index hit the lowest level since August 2016, as the new orders component fell to 52.9 from 63.1 and employment dropped to 47.0 from 55.6, while the business activity portion of the report slid to 48.0 from 57.8—posting the first contraction since July 2009. The ISM said respondents are concerned about the coronavirus impact on the supply chain, operational capacity, human resources and finances, as well as the ramifications for the overall economy.

The final Markit U.S. Services PMI Index for March was revised higher to 39.8 from the preliminary estimate of 39.1, compared to expectations of 38.5, and below February's 49.4 level. A reading below 50 denotes contraction. Markit said this was the lowest reading since the series began ten-and-a-half years ago as the coronavirus pandemic led to business closures and sharply reduced client demand for services from both businesses and households. Similarly, the report noted that public health measures to tackle the spread of the virus across key export destinations caused a marked fall in new export orders. As such, firms were reportedly forced to implement hiring freezes and make redundancies, with business expectations over the coming twelve months slumping to a record low due to uncertainty surrounding the longevity of the outbreak.

Markit's release is independent and differs from the ISM report, as it has less historic value and Markit weights its index components differently, while its survey respondents include those that vary more in company size, including the small and medium-sized companies that are facing the brunt of the impact from the COVID-19 pandemic disruption.

Treasuries were mostly higher as the markets grappled with the festering COVID-19 pandemic uncertainty and the coinciding spike in unemployment, along with the massive amounts of fiscal and monetary policy responses. The yield on the 2-year note was flat at 0.23%, while the yield on the 10-year note declined 2 basis points (bps) to 0.61% and the 30-year bond rate fell 3 bps to 1.23%. Amid the unprecedented market action, Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article how to Make Sense of Recent Bond Market Turmoil, noting that for some investors, the best course of action may be to do nothing. She adds that if you have a diversified portfolio that is designed to last through market ups and downs, you may be best off waiting out the storm. However, Kathy provides some advice for those who are upset by the volatility, delivering some steps that would make sense. Moreover, Schwab's Fixed Income Director, Cooper Howard, CFA, offers analysis outside the Treasury markets in his latest article, Coronavirus and the Municipal Bond Market: Questions and Answers.

Europe mostly lower as data reflects pandemic disruption, Asia mixed

European equities finished mostly lower, as the markets processed the larger-than-expected March job losses in the U.S., while Markit's reports on global business activity for last month showed the sharpest contractions on record in the Eurozone and U.S. Services sector output out of the U.K. also posted a decisive contraction as well. The severe disruption in economic and social activity of the COVID-19 pandemic continued to dominate sentiment, with the U.S. likely heading toward troubled waters and key regions in Europe remaining in critical condition, while global cases topped the 1 million mark. The massive amount of fiscal and monetary policy responses have been cheered by the markets, but the extreme uncertainty regarding the depth and duration of disruption remains high. The euro and British pound were lower versus the U.S. dollar and bond yields in the region were mixed. Schwab's Jeffrey Kleintop notes in his commentary, Q&A on COVID-19: The Economy, Markets and What Investors Should Do, that rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the duration rather than the decline.

The U.K. FTSE 100 Index was down 1.2%, France's CAC-40 Index dropped 1.6%, Germany's DAX Index decreased 0.5%, Switzerland's Swiss Market Index declined 0.3%, and Italy's FTSE MIB Index tumbled 2.7%, while Spain's IBEX 35 Index ticked 0.1% higher.

Stocks in Asia finished mixed to close out the week, with the markets remaining skittish amid the continued spreading of the COVID-19 pandemic that has the world's largest economy currently as the epicenter, with the U.S. posting another spike in unemployment claims. The massive fiscal and monetary responses are being digested, with China announcing further support for the banking sector by cutting the amount of reserves needed to be held by the sector. The markets digested some services sector activity reports out of China and Japan that showed although March output improved, both remained at levels depicting contraction. Japan's Nikkei 225 Index finished little changed, along with South Korea's Kospi Index, while China's Shanghai Composite Index declined 0.6% and the Hong Kong Hang Seng Index dipped 0.2%. Australia's S&P/ASX 200 Index remained volatile, falling 1.7% as most sectors declined to overshadow a gain for the energy sector as crude oil prices rallied sharply yesterday. India's S&P BSE Sensex 30 Index fell 2.4% in a return to action following yesterday's holiday break. Schwab's Jeffrey Kleintop, notes in the aforementioned commentary, What Will The Recovery Look Like?, how early signs in Asia of a V-shaped rebound are encouraging, but may instead look more like a square root, flattening out as weaker global growth saps Asian economic momentum in the second quarter. Jeff concludes with noting that emerging markets, led by China and South Korea, are leading the recovery in the economy and markets as they did during the global recessions of 2000-02 and 2008-09.

Stocks post another weekly decline as volatility remains

U.S. stocks registered a third weekly drop in four, with volatility and uncertainty remaining at extreme levels, courtesy of the intensifying COVID-19 pandemic disruption. The range of movement in the equity markets settled down a bit relative to the past three weeks that saw swings in both directions north of 10.0%. The markets found some calming effects of the massive amount of monetary and fiscal policy ammunition discharged aimed at stabilizing the critical credit markets, combating a surge in unemployment for small-and-medium sized businesses, keeping severely impacted industries from collapsing, and supporting the stressed healthcare system. Moreover, news of potential breakthroughs from the biotechnology sector offered some glimmers of hope that virus mitigation efforts may be expedited through possibly faster detection, containment and treatment options.

However, conviction remained elusive that the markets put in a bottom on March 23rd, as visibility of the light at the end of the coronavirus tunnel remained obstructed with the U.S. heading toward rough waters. The world's largest economy now has the most global cases of COVID-19 and death tolls continue to rise, while weekly initial jobless claims posted another record surge of roughly 6.6 million for the week ended March 28th, doubling the prior week's approximate 3.3 million spike. The data suggested that the wave of unemployment will likely continue to swell as some more heavily-populated regions of the country announced lockdown measures this week. Also, global manufacturing and services data showed output contractions for March, with the exception being China, which surprisingly returned to expansion territory after February's sharp tumble to contraction territory.

Most major market sectors fell, but defensively-natured consumer staples and healthcare sectors managed to gain ground. The energy sector was a standout winner, rallying sharply on the week as crude oil prices bounced decisively off of near two-decade lows after U.S. President Donald Trump suggested Russia and Saudi Arabia could soon end their price war by announcing reductions of output in the range of 10-15 million barrels per day. Also, there was growing optimism that OPEC and its allies—known as OPEC+—could announce an unprecedented oil production cut at its meeting early next week. The U.S. dollar resumed a rally, gold dipped in choppy action, and the Treasury yield curve flattened. For a look at the markets, check out the SCFR's article, Stocks Drop as Coronavirus Fears Sink In.

Next week, although shortened by the Good Friday holiday, on which the U.S. markets will be closed, volatility is likely to continue amid the coronavirus uncertainty and as jobless claims is set to headline the economic docket. Bloomberg is projecting another surge, this time 5.0 million of initial unemployment claims for the week ended April 4th. Another timely piece of data that may be scrutinized will be the April preliminary University of Michigan Consumer Sentiment Index, projected to show the psyche of the all-important U.S. consumer fell to lows not seen since the end of 2013 but still well above the readings posted during the global financial crisis. Mortgage applications for this week and a host of March inflation reports will also likely garner attention.

International reports due out next week that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision. China—March inflation figures and lending statistics. India—Services PMI. Japan—February household spending and core machine orders. Eurozone—April investor confidence. U.K.—March new car registrations.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.


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