Restrictions to the U.S. and world economies continued throughout April, leading to increased discord amongst governments and citizens alike. Opinions about the potential health impact of the virus, and how to deal with its containment, are vastly diverse. Among investors, these opinions likely vary to the same degree. However, a more positive overall economic sentiment was reflected in U.S. equities as prices rebounded sharply in April. While first quarter GDP contracted at a -4.8% annual rate, the true impact of shutdowns won’t be fully reflected until second quarter GDP is announced, which presently is expected to be around -30%. The effects of economic restrictions are being felt by nearly all, either directly or indirectly. Unemployment, which came in at 4.4% in March, is expected to rise to 16.2% when the April data is released. Manufacturing activity is slowing, as durable goods orders slowed by 14.4% and the ISM Manufacturing Index fell to 41.5, far below the neutral level of 50. To combat the negative effects of the shutdown, the Fed has cut the Fed Funds rate to zero and the government has pumped trillions of dollars of stimulus into the economy. Clearly, there are far too many variables to accurately predict the length or depth of this economic contraction, or our recovery from it. But, as Warren Buffett wrote a few years back, "For 240 years it's been a terrible mistake to bet against America, and now is no time to start." This likely remains true today.
Equities rebounded sharply as investors either recognized bargains or bet on the resiliency of the U.S. economy, or both. Domestic equities outpaced foreign issues continuing a long-term trend. Leading equity returns was the tech-heavy Nasdaq Index, which finished April over 15% higher, bringing the YTD return for that Index to nearly flat. Small cap stocks, as represented by the Russell 2000, returned nearly 14% for the month but trail the field so far this year at -21%, struggling to make up for their sweeping first quarter sell-off. Energy stocks set the pace, with that sector up nearly 30% for the month but remain down over 35% for the year so far. Finally, the Information Technology sector finished April with nearly a 14% return, bringing its YTD return into positive territory.
With Fed Funds at zero, no immediate further Fed action expected, and Treasury debt at or near historic lows, bond investors sought yield in spread-based debt (bonds that pay an additional yield, or spread, over and above the Treasury yield). Bond market returns thus reflected the positive sentiment displayed by equity markets as corporate debt, both investment grade and high-yield, led returns for April at 5.3% and 3.8% respectively. Despite the strong month, high-yield debt still drastically trails other debt instruments for the year, with a -9.8% YTD return. Conversely, the broad Treasury debt market, as represented by the Treasury Master Index, still leads YTD returns at 9.2%.
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