April Turns to May*
April “green shoots” produced the best monthly stock market return for any month since 1987. On one hand, that’s fitting both since March had given us the worst stock volatility since 1987, and because the stock market reflects collective expectations for the future, not the conditions of the present or the near past. On the other hand, it’s disconcerting to see stocks rise so much against a drumbeat of such bleak economic news while daily updates reveal the disease is only very slowly easing its grip.
This week included a 1st quarter GDP report (down 4.8% yoy), a Federal Reserve Meeting (re-pledging aggressive easing as long as necessary), a report of progress in development of a treatment for COVID-19 (which looks to be only marginally effective), and new unemployment benefit filings accumulating to 30 million for the crisis (and, as previously mentioned, even if only 20% of that is what we traditionally consider unemployed, as some think, that’s still high and the other 80% or so are still furloughed and not currently earning incomes).
Into these crosscurrents come quarterly earnings, as many leading companies report this week and next. Most companies are eliminating forward “guidance” in this, the most unusual earnings season of any investor’s lifetime. In addition to the already high volatility for overall markets, this is also a sub-period of exceptionally high volatility among individual stocks, in addition to that of the overall market.
As of Thursday, the S&P 500 was down just 10% in price this year to date, after having leaped 35% from its low only five and a half weeks earlier. Given the high drama of the stock market’s rapid and severe decline followed by such a rapid and substantial (yet partial) recovery, some developments in bonds have likely been unnoticed. We understand many investors consider bonds a monolithic, unappealing, low return necessity, mostly useful for dialing portfolio volatility back to more manageable levels. In fact, there have been lots of crosscurrents, volatility, and drama within the world of bonds of late as well, but generally (though not always) on a smaller scale than that of stocks so bonds have gotten far less attention.
Only one of many dramas in bonds so far this year has been the divergence between Treasury bonds and essentially all other bonds. The 10-year Treasury bond offered a yield of 1.92% as recently as year-end, and now yields only 0.62%. Since most bonds’ stated interest rates (their “coupons”) don’t change, that 1.3% drop in yields required a meaningful and commensurate rise in bond prices. With that the Treasury and Government-heavy Bloomberg Barclays US Aggregate Bond Index has produced a total return of 5% this year through 4/30. In contrast, the total return of the Bloomberg Barclays Municipal Bond Index has been -1.9% over the same period. As US Treasury Bond yield have fallen precipitously, yields on municipal bonds have actually risen a bit. As is typical in a crisis, bonds provided a bit of shelter in the storm of stock volatility, but only Treasuries rose in price. Relative opportunities in municipal bonds have improved looking forward, but they have been much less of a buffer than have Treasuries during the crisis.
Several states are beginning a partial and tentative re-opening. The number of new cases of the virus is receding in New York and a number of other states, including Florida, New Jersey, Connecticut, and Louisiana. In most of the rest of the states, the growth rate in identified cases has declined even as testing has increased. Now we need to see if this progress can translate into economic progress through the easing of lockdowns. The stock market is clearly looking through this storm to the other side. But the stock market in recent weeks has grown much less attractive from a valuation perspective so our expectations for market returns have diminished and we recognize a greater possibility of more volatility in the near term.
April was a “green shoots” month of progress against the virus, and May shows promise to continue that trend on the health front and to begin to perhaps find a bottom for the economy. Stocks are extremely unlikely to experience gains this month like those of April, and it would in fact not be unusual to see some May storms along the way. If we do, hang in there. Hopeful signs imply they may be of diminished intensity at least for a while as we move forward.
“… he speaks holiday, he smells April and May…”
– Merry Wives of Windsor
* “Every Step of the Way”, Johnny Mathis