April 2020 Market Commentary
Over the past month, global equities rebounded from the notable decline that occurred in March. This was largely driven by a decline in the spreading of the COVID-19 (a.k.a. the corona virus) and some countries began to partially re-open their economy. Within the U.S., large caps returned +12.8% - it’s highest monthly return in decades. U.S. equity volatility, as measured by the VIX Index, decreased -36.2% to 34.2 – after reaching record levels in March. Abroad, emerging markets outperformed international developed stocks, returning +8.8% versus +5.5%.
The Federal Reserve announced a lending program that will provide up to $2.3 trillion in loans to support the economy. Later in the month, the Federal Reserve kept the policy rate target range at 0.0% - 0.25% to provide additional support. Both measures helped dampen the effect of the large jump in unemployment claims, where approximately twenty million people filed for an initial jobless claim over the month. Disappointing economic data continued to be released throughout the month, including the U.S. composite PMI dropping to 27.4 from 40.9 one month earlier.
The U.S. ten-year yield fell three basis points and ended the month at +0.64%. On April 21st, the ten-year yield fell to +0.55% after oil futures fell to below zero for the first time ever1. Towards the end of the month, news of easing lockdown restrictions and economies reopening led to an increase in yields.
The price of crude oil had a highly volatile month and declined -8.0% - this was on top of the record 54% decline in March. On April 20th, the front month WTI crude oil contract briefly entered negative territory. Low global demand along with economic lockdowns led to the largest inventory build reported by the Energy Information Administration in several years.
Gold prices rose +7.0% as weak economic data along with delicate risk sentiment led the safe haven commodity to rally. At the beginning of the month, the sharp rise in U.S. unemployment claims and fiscal stimulus by the Federal Reserve led gold to reach a multi-year high. Gold ETF demand also reached record levels as investors’ concerns around the impact of the coronavirus continued.
Source: Bloomberg, 1Reuters
Short-Term Market Outlook
Our proprietary leading economic indicator declined month-over-month and moved further into negative territory. This reading was largely driven by weakness in manufacturing data and a decline in average hours worked.
QS Leading Economic Indicator
Our tactical stock-bond model now prefers investment grade bonds versus U.S. stocks. This is driven by weakness in the QS leading economic indicator. The valuation factor, which compares the earnings yield of the S&P 500 relative to the ten-year treasury yield, continues to support stocks.
In U.S. fixed income, we forecast that high yield will outperform investment grade bonds over the near term, and this reading is at a historic level. The decline in U.S. equity volatility month over month is driving this preference, as it was at an all-time high in March.
We believe that U.S. stocks are positioned to outperform versus their international-developed market counterparts, a similar view compared to last month. Yield curves in other developed markets are flattening at a faster rate than in the U.S., which we interpret as a sign of lower economic prospects and supports U.S. equities. Equity price momentum also prefers U.S. stocks.
European bonds are forecasted to strongly outperform European stocks in our model – compared to a neutral view last month. This preference is driven by a significant decline in European Leading Economic Indicators. Valuation, as measured by comparing European equities earnings yield to the ten-year government yield, continues to support European stocks.
Asset Class Preferences
Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.
*Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; U.S. Small Cap Equities represented by Russell 2000 Total Return Index; European Equities represented by MSCI Europe Gross Total Return Local Index; Italy Equities represented by MSCI Italy Index (MXIT Index); Spain Equities represented by MSCI Spain Index (MXES Index); Greece Equities represented by MSCI Greece Index (MXGR Index). China Equities represented by MSCI China Net Total Return Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Emerging Market Fixed Income represented by J.P. Morgan EMBI Global Core USD Index.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
QSCR-19071 (May 2020)