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Vaughn Asset Advisory Weekly Market Commentary & Update -EQUITIES DOWN SLIGHTLY AS OIL. . .

Vaughn Asset Advisory Weekly Market Commentary & Update -EQUITIES DOWN SLIGHTLY AS OIL. . .

| April 28, 2020
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Vaughn Asset Advisory Weekly Market Commentary & Update


Equities couldn’t make it a three-peat last week, falling 1.6% (MXWD) at the global level. But as has been the recent trend, domestic shares led the way (SPX -1.3%). International developed markets and emerging equities lagged, down 2.0% (MXEA) and 2.4% (MXEF), respectively, on the week. 


Coming off of last month’s equity bottom, growth continues to outperform value. The year-to-date total return spread is 14.5%, which is the highest over this duration that we’ve seen since the Global Financial Crisis (Figure 1). This is a big week for earnings (50% of the S&P 500 Index by market cap reports). Watching how how these styles perform should give us a better sense of how durable the current equity market recovery is and what the investment landscape might look like coming out of the shutdown.

Improving equity sentiment

It is a bit remarkable that even in such a historic week for oil, where we saw the U.S. benchmark front month West Texas Intermediate (WTI) contract trade to negative $40, the S&P 500 closed down only 1.3% — and with the energy sector as the best performer. The takeaway? This points to better investor sentiment overall and the power of short covering in a market with very high dispersion. For the record, energy is still the worst performing sector on the year, firmly in that position by over 12%. 

Realized volatility keeps falling, down another 17% last week, further evidence that things are stabilizing or even improving.

Fixed income investors still cautious

In very similar price action to the prior week, fixed income investors showed caution around the outlook.  Government bond yields fell in the long end, with the 10-year down 4 basis points (bps) and the 30-year down 9 bps.

Credit spreads widened

Credit spreads widened last week, with Investment-grade (IG) spreads up 7 bps and High-yield (HY) up 86 bps.

the big question now is whether here’s value at these levels in HY. While HY spreads are now wider than in 2011 or 2016, they’re nowhere near 2008 levels (Figure 2).

And while the Fed has pledged to backstop IG debt, support for HY is likely to be minimal, which could mean levered companies get left behind and we may see more bankruptcies in the future. Investors will likely continue to prefer IG over HY credit exposure in the near-term.

Fed balance sheet up $2.3 trillion

The Fed again lowered their planned purchases of U.S. Treasuries (UST) for the coming week. Already, the Fed owns about $5.3 trillion in UST and mortgage-backed securities (MBS). Its balance sheet has ballooned by $2.3 trillion since the start of the COVID-19 crisis. And their support programs for credit and commercial paper haven’t even gotten up and running yet. The Fed meets this week and while it’s possible we’ll get an update on its economic projections, the market likely won’t pay much attention given the uncertainty.

Oil likely to remain volatile

Oil markets made history and dominated headlines last week, especially in the first half of the week. The May WTI contract, which expired on Tuesday, plunged below zero for the first time ever due to three factors: oversupply, dwindling demand, and the technicals of the futures market. With storage capacity maxed out — multiple supertankers are reportedly now acting as storage facilities or sitting offshore with no place to put the oil — the near term outlook for oil remains bearish. The June contract, now the front month contract, fell 32% on the week to close below $17.

What’s moving markets now?

Coronavirus-related news improving – Coronavirus-related news continues to improve. Europe, while still mostly locked down, is now past the peak of new cases. Many parts of the U.S. are closer to reopening as well. While it’s still too early to know what a reopening means for consumer behavior, people are clearly getting a bit stir crazy.

U.S. Congress passes fourth stimulus bill – In the U.S., Congress passed their 4th stimulus bill, worth almost half a trillion dollars.  Mostly this will top up the PPP aid to small businesses.  Another 4.4m weekly jobless claims were filed according to the latest data, bringing the total to 26.5m job losses in the past 5 weeks. Our sense is that this streak of war-like bipartisanship in DC has come to a close with this bill.  Don’t expect more government stimulus.

Earnings season in full swing – Roughly 50% of the S&P 500 Index (SPX) by market cap reports this week. This is the most important week.  So far, outside of the higher credit provisions for financials, earnings season has not had a huge impact. This makes sense to us given the historic uncertainty around what the future holds. That said, given the top-heavy nature of the U.S. market, and with the five biggest companies by market cap reporting in the same week, earnings this week are likely on everyone’s radar.

Data this week

Central Banks – Three major central banks meet this week: Bank of Japan, Federal Reserve, and European Central Banks. Japan already announced additional support to credit markets and removed their cap on bond buying. The Fed and ECB? Not much is expected. The Fed has already taken lots of emergency actions. This week’s meetings are a formality, but the tone of the press conferences will be carefully scrutinized.

GDP for U.S. and Europe – GDP from the U.S. comes out Wednesday and Europe’s on Thursday. The forecasts are very wide, but it’s important to realize that these figures will only reflect the first quarter, when economies had only been shut for a few weeks. The real pain will be felt in the second quarter.

China PMI – China’s PMI comes out on Thursday. We saw a big downdraft in February and upswing in March. While faith in the numbers coming out of China has been low, assuming those numbers were credible, the March rebound was likely due to a snap back as things came online again, so base effects dominated. This time around, we don’t have that luxury, so it will be important to see sustained expansion or the market may begin to question the “first in, first out” narrative.

U.S. ISM Manufacturing – On the U.S. side, manufacturing has not been hit as much as services, so the ISM manufacturing report may not be as relevant but it provides a timely update for a trusted series. Expectations are for a 36 reading. The scale is 0-100, with 50 marking the dividing line between expansion and contraction. The low in December of 2008 was 34.5 (Figure 3).





David V. Thomas, Jr.  offers products and services using the following business names: Vaughn Asset Advisory, LLC – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services (AAS) – investment advisory services. AIC and AAS are not affiliated with Vaughn Asset Advisory, LLC.

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 The views stated in this letter are not necessarily the opinion of Ameritas Investment Company, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past performance does not guarantee future results. There is no guarantee that any investment strategy will generate a profit or prevent a loss. Investing in the securities markets involves risk, including loss of principal. The commentary provided should not be considered or used as a substitute for individual investment advice.

 All market data and economic data has been provided by Horizon Investments & Bloomberg

 Copyright 2020 Vaughn Asset Advisory, LLC


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