U.S. Stock Market
Several of the major indexes bounced off bear market lows in April and posted their best monthly returns since 1987, as investors anticipated a partial reopening of the global economy. All sectors in the S&P 500 Index recorded gains, although they varied widely. Energy shares rose nearly 30% on a total return (including dividends) basis, despite domestic oil prices falling deeply into negative territory (USD -38 per barrel) on April 20. The beleaguered sector remained down nearly 36% for the year to date, however. Consumer discretionary shares gained almost 21%, and the 14% gain in technology shares returned the sector to positive territory for the year. Utilities shares lagged, rising a bit more than 3%.
Flattening the Curve Fosters Reopening Hopes
Several positive trends in the fight against the coronavirus seemed to play the lead role in bolstering sentiment in April. Stocks fell sharply on the first day of the month, as investors reacted to warnings from White House officials of the possibility of up to 240,000 deaths in the U.S., even with mitigation efforts in place. Over the following days, however, signs emerged that some of the hardest‑hit regions in the U.S. and elsewhere were “flattening the curve” of the pandemic in terms of hospitalizations and fatalities. The University of Washington’s widely watched model predicting the course of the outbreak also significantly lowered the expected number of deaths in the U.S. Stocks continued to rise through mid‑month, as governors in several states began announcing plans for the gradual reopening of businesses and public facilities, such as state parks and beaches. Boeing and other major firms also announced plans to partially reopen some manufacturing facilities.
Glimmers of hope appeared on other fronts as well. On April 17, stocks jumped after unofficial reports surfaced that Gilead Sciences was having success in U.S. trials of remdesivir, its experimental treatment for COVID‑19, the disease caused by the coronavirus. A week later, stocks fell following a report that remdesivir had failed in an early clinical trial in China, but Gilead quickly disputed the findings, stating that the trial was inconclusive given its early termination due to a lack of participants. Indeed, on April 29, Gilead Sciences announced that, in a large U.S. trial, remdesivir had performed well reducing the severity of the disease. Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, stated at the White House that the drug had a “clear‑cut, significant, positive effect in diminishing the time to recovery.” Progress on a vaccine remained much slower, but investors seemed to be encouraged by reports that an Oxford University team might have one available as early as September.
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Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended April 30, 2020. The returns include dividends based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Consumer Spending Plummets as Nearly One‑Fifth of Workers Lose Jobs
While hopes for an eventual exit from the pandemic may have grown, evidence of the stark toll it is currently taking on the economy accumulated and appeared to restrain the market’s gains, particularly late in the month. Weekly jobless claims declined from their late‑March peak but remained at historic highs and exceeded consensus expectations. On April 30, the Labor Department reported that another 3.8 million Americans had filed for unemployment in the previous week, bringing the six‑week total to more than 30 million, or approximately 18% of the U.S. working population. March personal incomes also dropped more than expected, while personal spending tumbled 7.5% and retail sales plunged 8.7%—both the largest drops on record. The strain on corporate profits was also visible. At the end of the month, analysts polled by FactSet were estimating that overall earnings for companies in the S&P 500 would fall about 14% (on a year‑over‑year basis) in the first quarter and are expected to contract by 37% in the second quarter.
Even as most analysts agreed that the U.S. had entered a steep recession in March, investors drew hope from a new round of stimulus measures. The S&P 500 Index had its best day of the month on April 8, after the Federal Reserve announced a program promising USD 2.3 trillion in loans to smaller businesses and municipalities. The Fed also announced it would allow investment in lower‑quality debt as part of its Term Asset‑Backed Securities Lending Facility and other emergency lending programs. Later in the month, President Donald Trump signed into law a USD 484 billion spending bill to replenish a new but swiftly depleted program providing loans to small businesses and provide further funding for coronavirus testing and hospitals.
Long Recovery Expected
The market’s strong rally off its March 23 lows has surprised many observers, especially as data released over the following weeks have seemed to indicate that the recession will be steeper and more prolonged than most early estimates. It seems likely that the primary driver of the rally, however, has been the unprecedented level of fiscal and monetary stimulus—around USD 10 trillion and counting—pumped into the global economy. T. Rowe Price’s head of global multi‑asset investing, Sébastien Page, notes that the liquidity‑fueled rally has heavily favored growth stocks and large‑caps over small‑caps and value shares, which would be expected to do better if a rebound were imminent. Instead, these divergences appear to suggest that the market is pricing in a long recovery.
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