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Weekly Investment Update

US equity markets advanced more than 3% last week as investors eyed signs of hope that the recession caused by the COVID-19 virus may be short-lived. Despite a dismal April employment report and large year-over-year declines in first quarter corporate earnings, signs of new treatments for the virus and plans for reopening businesses buoyed market sentiment. The S&P 500 has advanced 31% from the near-term market bottom set on March 23. The index is now down just 9% for 2020 and only 13% from the all-time daily closing high of 3,386 set on February 19. So, in a span of 5-6 weeks, large cap US equities lost 34% of their value, only to regain most of it back in the subsequent 5-6 weeks: an incredible period of volatility in both markets and the economy.

Chart 1: S&P 500 Price-to-Expected Earnings Ratio


April’s employment report, released last Friday, showed a record 14.7% unemployment rate with payrolls declining by 20.5 million in the month (the previous record since the government began officially tracking the data in 1948 was 10.8% marked during the financial crisis of 2008-2009). The April employment report survey was conducted until the middle of the month, so the additional approximately 7 million individuals who filed for unemployment benefits during the last two weeks of the month were not included, which implies that the true unemployment rate may be closer to 20% or higher. The leisure and hospitality industry reported nearly 8 million jobs lost during the month as activity in restaurants and hotels was significantly reduced.

In addition to the headline unemployment rate published by the Bureau of Labor Statistics which is most often quoted, the agency also publishes its “U-6 Unemployment Rate” which includes all unemployed workers actively seeking a job (the headline “U-3” rate quoted above) plus discouraged workers no longer seeking employment but are able to work and part-time workers who would prefer full-time work. This broader measure of employment also reached a record in April of 22.8%; the previous record was 17.2% seen during the financial crisis (Chart 2).

Chart 2: U-6 Unemployment Rate


As of Friday, 86% of S&P 500 companies have reported earnings results for the first quarter with an average year-over-year decline of 14%. The quarter is on track to mark the largest decline since the third quarter of 2009 when corporate profits fell 16% from the year before. If these estimates are correct, then S&P 500 earnings for 2020 will be approximately $135 per share, which means that the index trades at 22x this year’s expected results. This price level may imply that investors are optimistic that the likely recession caused by the COVID-19 virus may be short-lived. Chart 3 below shows the significant dispersion in earnings growth during the first quarter as healthcare and beneficiaries of the stay-at-home orders grew earnings (staples, tech, communication) while more cyclical sectors saw steep declines.

Chart 3: Q1 Earnings Growth by Sector

Key Economic Releases This Week

Asset Class Returns

Prices & Interest Rates

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