Weekly Update

Weekly Update

for Week Ending April 3rd, 2020

Global Equities: US equities ended the week lower as hopes fade for a quick resumption to a pre-COVID19 world. A wide variance among returns for the different sectors was highlighted by an over -6% drop in Financials, Utilities, and Real Estate, while the beaten-down Energy sector jumped over 5% to lead the runner up Consumer Staples’ 3.4% rise. The Dow Jones Industrial Average led the major indices to the downside, falling -2.7% on the week, while the S&P 500 Index fell -2.0%. Developed international markets underperformed again this week, with the iShares MSCI EAFE ETF (EFA) falling -3.7% as the European Union struggles to collectively agree to a plan to combat COVID19-related economic woes. Emerging Markets outperformed despite a second coronavirus flare up in China, as the iShares MSCI EM ETF (EEM) dropped just -0.7%.

Fixed Income: The yield on the 10-year US Treasury dropped around -0.1% in relatively benign fashion when compared to recent volatility, closing the week near 0.6%. Another large jump in Federal Reserve (Fed) liquidity injections allowed the second-straight week of record investment grade corporate debt issuance, with $110.5 billion hitting markets as companies beef-up cash hoards to deal with the slowdown. Sub-investment grade or high yield debt wasn’t so lucky, falling more than US large cap equities despite energy credits finding a bid, as the iShares iBoxx US High Yield Corporate Debt ETF (HYG) dropped more than -4% during the week.

Commodities: News that a US oil official has been invited to an emergency OPEC+ video meeting sent prices rocketing higher on hopes of a potential production cut that may include several other non-OPEC countries. President Trump mentioned a possible cut of 10 million barrels per day, with the potential for more to help curb the supply imbalance that threatens US shale oil producers. US energy stocks found some relief as the West Texas Intermediate oil benchmark ended the week up a whopping 33.8%, near $28.80 per barrel, as the International Brent crude benchmark rallied over 39%, to $34.68 per barrel.


Unemployment Spike: The Bureau of Labor Statistics’ Employment report showed that total non-farm payroll decreased for the first time in a decade, falling by -701k versus expectations for -150k decline. This paints a disturbing picture, as the BLS compiled this information in early March, before the broad shutdown of US businesses. This caused the official unemployment rate to jump from the 50-year low of 3.5% to 4.4%, with the worst of the data still to come. Average hourly earnings rose .4% during the month, slightly higher than expected and skewed higher due to the dynamic of lower-wage workers being laid off first.

PMI Weaker Than Headline: The IHS Markit Manufacturing Purchasing Managers Index fell into contraction territory, to 48.5, though the headline number masks the severity of the deterioration from the underlying components. A large increase in supplier delays, which usually signals strengthening demand, helped the headline number that would otherwise be in the low-to-mid 40s thanks to the steepest declines of output and new orders since the ’08-’09 financial crisis. The gauges for employment and prices fell steeply, as well, with the COVID19 pandemic rightly taking the blame.

Fed Balance Sheet Swells: Federal Reserve balance sheet assets rose by over 10% in a week, to $5.81 trillion, as the monetary authority continues to ease financial stress in a variety of ways. The Fed also announced on Wednesday that it would be easing the leverage rules placed on large banks to help provide needed credit to businesses and households affected by the pandemic shutdown. However, there are still operational issues with getting funds available to those in need, as giants such as JP Morgan and Wells Fargo struggle with a lack of detailed guidelines for providing the assistance outlined in the most recent coronavirus relief bill.


The Chart of the Week is a 3-year chart of the iShares iBoxx US High Yield Corporate Bond ETF (HYG), representing the performance of sub-investment grade or high yield corporate bonds. HYG performance has fallen into negative territory on a 3-year total return basis, below support at the 2018 low due to broad solvency concerns caused by the COVID-19 shutdown. We currently have no exposure to high-yield bonds in our Hanlon Tactical Models, and thus, have reduced weightings in our All-Weather Models and remain in appropriate weightings in the buy-and-hold portions of Hanlon Strategic Models.

Chart courtesy of StockCharts.com. Commentary, and opinions are those of Hanlon Investment Management.


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