Equities rebounded last week, with the U.S. market leading, up 12.1% (SPX). Foreign markets lagged, with International Developed up 8.1% (MXEA) and Emerging Markets up 6.7% (MXEF). 

Seeing its biggest one-week rally since 1974, the S&P 500 is now up almost 25% from its low just three weeks ago. Remarkably, that means the market is down only 13.2% year-to-date.

Small caps scream
In a swift reversal of trends that had been in place inside the U.S. equity market since mid-January, small caps screamed last week, up 18.5% (RTY), while the tech-heavy NASDAQ returned just 10.6%. Value led growth by 230 basis points (bps) last week but remains about 10% behind for this year.

Realized volatility keeps falling
In a sign that investors may be shifting from fear to opportunity, volatility continues to fall despite the massive move in equities last week. Two-week realized volatility fell 24% last week, down almost 60% from its peak in March, a healthy sign. 

Yield curve steepens
Yields broke their declining trend last week, as additional Fed action and investor optimism that the virus may be slowing steepened the curve. While the 2-year was flat, reflecting the Fed’s extended and unchanged policy stance, back end rates moved higher (10-year +12.5 bps and 30-year +13.3 bps). 

As the functioning of the bond market improves, the Fed also continues to lower its purchase amounts. As of last Wednesday, the Fed balance sheet is now more than $6.0 trillion, up $1.9 trillion since the end of February.

Credit spreads tighten on further Fed action
The real action last week was in the credit markets, due to Fed’s latest announcement that it would be rolling out three new facilities and expanding three others. The size and scope of the announcement, including that the Fed would be willing to buy “fallen angels” or companies that had been downgraded from investment-grade (IG) to high-yield (HY), clearly surprised market participants and credit markets gapped tighter [Figure 2]. Spreads on IG and HY debt declined 46 and 240 bps, respectively, last week and are now back to levels not seen since early March.

Unlike what we saw in March, credit ETFs are now trading at a significant premium to NAV, reflecting the slower moving nature of cash bond trading. We think this makes good sense for IG, but are less inclined to chase the HY move. Energy makes up a large percentage of HY and support from the Fed is likely to be small in nature. 

OPEC+ deal reached, low demand persists
Speaking of energy, the world’s top oil producers, represented by the OPEC+ cartel, reached a historic agreement to slash output by almost 10 million barrels per day (mb/d) over the weekend. While the deal should go a long way in dealing with oversupply issues and resolving the worst of the oil price war, what matters more for oil prices and the energy sector is the outlook for the global economy. With the world on lockdown, estimates of the oil supply glut are running at 20-30 mb/d, much greater than the agreed upon output cut. A resumption of activity is really what’s needed to improve the outlook.

What to watch

Coronavirus – Hopes that we’re nearing the peak of the coronavirus drove last week’s optimism, with the prior death toll revised down substantially by the White House and talk of a reopening in May growing louder. Uncertainty around these projections is high, however. 

China lifted the travel ban on Wuhan last week, and parts of Europe are considering relaxing restrictions soon. Watching what China and other countries ahead of us do, and what the response is, could help the U.S. define a clearer timeline for reopening and also anticipate what the reaction to lifted restrictions might be.

Jobless claims – Jobless claims soared for the third straight week, as another 6.6 million people filed for the week ended April 4th. A staggering 17 million people have lost their jobs in just three weeks. Consensus is that we could see another 5-plus million claims this week.

Politics – What would have been the news of the week two months ago passed with barely a whimper: Senator Sanders suspended his campaign, all but sealing the nomination for former Vice President Biden. Politics will matter again to markets, but not until life returns to something resembling normal.

Earnings season – Earnings season kicks off this week with big banks starting to report on Tuesday. Some analysts have revised their expectations down, but overall companies are challenged to give forward-looking guidance amid persistent coronavirus-related uncertainty. We think it will be important to watch what companies say about this, especially how much they say they’re able to plan with respect to the economy reopening.

China: Q1 GDP and retail sales data – China releases its Q1 GDP this week. Though there’s some skepticism around the numbers coming out of China, the Bloomberg consensus is that we’ll see a drop of 11.2% for the quarter, down 6% year-over-year. On Friday, the China retail sales report comes out too. 

U.S. consumer and retail data – The University of Michigan’s Consumer Sentiment Index took a tumble last week, it’s biggest single-month decline ever, hitting a low we haven’t seen since 2011. On its heels, the U.S. March retail sales report comes out this Wednesday. Per Bloomberg, expect to see a month-over-month decline of 8%, a figure that’s only likely to get worse going forward.

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