Fidelity Bank - Wealth Management
April 2020 Market Review
After the US stocks reached bear market territory at the quickest pace in history during the first quarter, April continued the bounce off market lows that began on March 24th. For the month of April US stocks returned 12.82%. Although COVID-19 has continued to spread globally, daily new infection rates have started to fall in many countries. The fall in infections and rise in recoveries is leading many countries to gradually reopen their economies. Governments and central banks introduced historic stimulus monetary policy measures to reduce the damage caused by the economic shutdown, restoring some positive sentiment to markets. Although, bond markets still rallied with the Bloomberg Barclays Aggregate Bond Index gaining 1.78%.
US Stocks gained 12.83% in April. This is the largest one month return since January 1987 and, based on data since 1950, this represents a more than 2.8 standard deviation event. Since the market lows on March 23rd , US stocks finished April higher by 30.17%. This spectacular market performance flies in stark contrast to the horrific jobs data. Since the week of March 13th, more than 30 million Americans have filed for unemployment. What a difference 6 weeks can make; the US will go have having its lowest unemployment rate in half a century to its highest.
All 11 of the Global Industry Classification (GIC) sectors were positive in April. After bearing the brunt of the coronavirus panic, Energy Stocks recovered some of their loses, gaining 30.85% in April. Year-to-date Energy Stocks are still down more than 35%.
From a Style and Cap perspective, Growth stocks fared better than Value stocks across market cap. Large Cap and Small Cap Growth gained 14.80% and 14.89%, respectively, while Large Cap value gained 11.24% and Small Cap Value gained 12.34%.
The US Dollar gave back some of its year-to gains in April against Developed Market and Emerging Markets currencies. The Dollar Index, which measures the US Dollar against Developed Market currencies, lost about 0.79%. The MSCI EAFE index gained 5.43% in local currency terms but gained more than 6.40% in US Dollar terms. The MSCI Emerging Market Currency Index gained 0.65% versus the US Dollar in April. The MSCI Emerging Markets index gained 8.80% in local currency, but the conversion to US Dollars caused that gain to become a 9.16% for US investors.
Fixed Income spreads ballooned in March as liquidity and solvency of many corporate issuers and mortgage back securities came into question. The Federal Reserve acted swiftly enacting several market operations to provide liquidity and order to many fixed income markets. This Federal Reserve support helped propel fixed income assets’ recoveries in April. Bloomberg Investment Grade Corporate Bond Index rallied 5.24%, its largest one month return since December 2008. High yield corporates returned a healthy 4.51%.
The option adjusted spreads to 10 Year Treasury bonds at the point of maximum stress reached 3.81% for Investment Grade corporate and 11.00% for High Yield Corporates. The long-term average OAS for High Yield Bonds is about 5.15%. Investors are concerned companies may face cash flow and financing issues should the economic lockdown caused by coronavirus materially impact operations. However, the gap out in spreads and support from the Federal Reserve may provide a buying opportunity for patient investors. The chart below observes the historical High Yield Bonds OAS versus the 3-year forward annualized return. The April ending OAS of 7.44% would indicate a 3-year annualized total return opportunity of about 10%.
Treasury prices stabilized in April, only gaining 64 basis points; however, Treasury Inflation Protected Securities (TIPS) rallied significantly, adding 2.78%, as inflation expectations rebounded in April. Ten-year inflation expectations bottomed in March as market participant priced in expected inflation of only 0.55%, although the Federal Reserve continues to target a 2.00% inflation goal.
Commodities were a mixed bag in April. Overall, the Bloomberg Commodity Index lost 1.54%. Industrial and Precious metals gained 2.29% and 5.90%, respectively, while Energy, Agriculture, and Livestock fell 3.46%, 5.67% and 5.13%, respectively. On April 20th, what some may call an interesting phenomenon and others may call a panic occurred in the WTI Crude Oil market. The May 2020 delivery of WTI Crude Oil futures contract expired on April 21. This mean the trader owning the contract at close of trading on April 21st must take physical delivery of the crude oil. One contract is 1,000 barrels of oil. Due to the abrupt economic slowdown, demand for crude oil has plummeted. This demand shock has caused crude oil storage space to become scarce. Capacity in storage facilities in Cushing, OK, the delivery hub for WTI Crude Oil, was nonexistent. Because of this, on the second to last day of trading of May 2020 contract, April 20th, the price fell as low as negative $40.32 and closed at negative $37.63. This means the traders trying to sell a contract were paying the next buyer of a contract more than $37,000 per contract to take the oil off their hands! The next day, on expiration of the contract, prices rebounded and closed at positive $10.01/barrel.
Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog at fddbank dot com. We would love to hear from you.
April 2020 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 4/30/2020. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.