Perspectives + Prospects - Saturday, April 25
The Market Week In Review
The U.S. stock market ended the week lower, as oil continues to plunge and coronavirus concerns linger. These concerns also sent interest rates lower, as the ten-year treasury yield fell from 0.65% last week, to 0.60% on April 24th. Meanwhile, the spread between the ten-year treasury yield and the two-year treasury yield narrowed from 0.45% to 0.38%.
The price of gold rose nearly 3.0%, to $1,744 an ounce this week, as investors continue to flee to the haven metal. The price of crude oil continues to tumble over concerns of a vast surplus, and even dipped below $0 a barrel on Monday, April 20. However, it ended up finishing the week at $16.94 a barrel, which is 5.5% lower than it was a week ago, and over 70% lower since the beginning of the year
Year-to-Date Return (as of 04/24/2020)U.S. Large-CapU.S. Small-CapDevelopedEmergingReal EstateBond MarketGoldOilJan-01Feb-01Mar-01Apr-01Feb-17Mar-16Apr-20-90%-80%-70%-60%-50%-40%-30%-20%-10%0%10%20%
| x | U.S. Large-Cap | U.S. Small-Cap | Developed | Emerging | Real Estate | Bond Market | Gold | Oil |
|---|---|---|---|---|---|---|---|---|
| Dec-31 | 0% | 0% | 0% | 0% | 0% | 0% | 0 | 0 |
| Jan-02 | 0.8% | 0.1% | 0.8% | 2.4% | -1.2% | 0.1% | 0.007 | 0 |
| Jan-03 | 0.2% | -0.3% | -0.4% | 0.6% | -0.6% | 0.5% | 0.021 | 0.029 |
| Jan-06 | 0.5% | -0.2% | -0.1% | 0.4% | -0.4% | 0.4% | 0.031 | 0.028 |
| Jan-07 | 0.3% | -0.5% | -0.2% | 0.3% | -1.6% | 0.3% | 0.035 | 0.025 |
| Jan-08 | 0.8% | -0.2% | -0.1% | 0.8% | -1.3% | 0.1% | 0.028 | -0.012 |
| Jan-09 | 1.4% | -0.1% | 0.3% | 1.3% | -1.3% | 0.3% | 0.022 | -0.025 |
| Jan-10 | 1.1% | -0.5% | 0% | 1.8% | -0.5% | 0.4% | 0.028 | -0.033 |
| Jan-13 | 1.8% | 0.2% | 0.6% | 3.2% | 0.6% | 0.4% | 0.02 | -0.048 |
| Jan-14 | 1.8% | 0.5% | 0.6% | 2.7% | 0.3% | 0.5% | 0.02 | -0.043 |
| Jan-15 | 2% | 1% | 0.6% | 2.1% | 1.2% | 0.7% | 0.025 | -0.051 |
| Jan-16 | 2.9% | 2.3% | 1.1% | 2.6% | 2% | 0.6% | 0.024 | -0.043 |
| Jan-17 | 3.1% | 2.1% | 1.4% | 3.2% | 2.1% | 0.6% | 0.026 | -0.039 |
| Jan-21 | 2.9% | 1.2% | 0.5% | 0.7% | 3% | 0.8% | 0.027 | -0.047 |
| Jan-22 | 3% | 1.1% | 0.8% | 1.3% | 2.4% | 0.9% | 0.027 | -0.073 |
| Jan-23 | 3.1% | 1.1% | 0.5% | 0.4% | 3.2% | 1.1% | 0.03 | -0.09 |
| Jan-24 | 2.1% | -0.2% | 0.2% | -0.4% | 2.9% | 1.3% | 0.036 | -0.11 |
| Jan-27 | 0.6% | -1.3% | -2% | -3.8% | 2.4% | 1.6% | 0.043 | -0.134 |
| Jan-28 | 1.6% | -0.5% | -1.1% | -2.9% | 2.8% | 1.4% | 0.033 | -0.123 |
| Jan-29 | 1.5% | -1.1% | -1.1% | -2.5% | 2.4% | 1.7% | 0.039 | -0.131 |
| Jan-30 | 1.7% | -1.1% | -1.3% | -3.8% | 2.5% | 1.7% | 0.039 | -0.136 |
| Jan-31 | -0.1% | -3.1% | -3% | -5.5% | 1.2% | 2% | 0.045 | -0.157 |
| Feb-03 | 0.8% | -2% | -2.7% | -4.9% | 1.6% | 1.9% | 0.038 | -0.182 |
| Feb-04 | 2.4% | -0.5% | -1.1% | -2.6% | 2.6% | 1.6% | 0.025 | -0.186 |
| Feb-05 | 3.4% | 1% | -0.1% | -2% | 2.7% | 1.4% | 0.026 | -0.165 |
| Feb-06 | 3.7% | 0.8% | 0.2% | -2.1% | 3% | 1.5% | 0.031 | -0.165 |
| Feb-07 | 3.1% | -0.5% | -0.8% | -3.4% | 3% | 1.8% | 0.034 | -0.175 |
| Feb-10 | 3.9% | 0.1% | -0.5% | -2.8% | 4.1% | 2% | 0.037 | -0.19 |
| Feb-11 | 4.2% | 0.8% | 0.1% | -1.6% | 4.9% | 1.8% | 0.033 | -0.18 |
| Feb-12 | 4.8% | 1.5% | 0.5% | -0.3% | 5.6% | 1.7% | 0.032 | -0.157 |
| Feb-13 | 4.8% | 1.7% | -0.2% | -1.4% | 6.2% | 1.8% | 0.038 | -0.156 |
| Feb-14 | 4.9% | 1.3% | -0.2% | -1.6% | 7.3% | 1.9% | 0.043 | -0.146 |
| Feb-18 | 4.7% | 1.1% | -0.9% | -1.9% | 7.2% | 2% | 0.056 | -0.148 |
| Feb-19 | 5.2% | 1.6% | -0.5% | -1.1% | 5.7% | 2% | 0.062 | -0.128 |
| Feb-20 | 4.9% | 1.9% | -1.2% | -2.5% | 7% | 2.3% | 0.067 | -0.121 |
| Feb-21 | 3.8% | 0.9% | -1.7% | -2.8% | 7.3% | 2.5% | 0.083 | -0.13 |
| Feb-24 | 0.4% | -2.2% | -5.5% | -6.2% | 5.8% | 2.9% | 0.092 | -0.163 |
| Feb-25 | -2.7% | -5.6% | -7.1% | -7% | 3% | 2.9% | 0.073 | -0.188 |
| Feb-26 | -3.2% | -6.7% | -7.1% | -6.4% | 1.9% | 2.9% | 0.077 | -0.206 |
| Feb-27 | -7.4% | -10% | -9.9% | -8.6% | -3.6% | 3% | 0.078 | -0.237 |
| Feb-28 | -8.1% | -11.7% | -10.4% | -8.9% | -5.9% | 3.7% | 0.038 | -0.262 |
| Mar-02 | -4.2% | -8.8% | -9.2% | -7.1% | -1.9% | 3.6% | 0.044 | -0.227 |
| Mar-03 | -6.7% | -10.7% | -10% | -7.6% | -2.1% | 4.2% | 0.077 | -0.229 |
| Mar-04 | -3% | -8.2% | -7.5% | -6.3% | 1.6% | 4.2% | 0.079 | -0.233 |
| Mar-05 | -6.2% | -11.1% | -9.9% | -8.1% | -0.6% | 4.6% | 0.102 | -0.251 |
| Mar-06 | -8% | -12.8% | -11.2% | -9.8% | -2.3% | 5.3% | 0.103 | -0.32 |
| Mar-09 | -15.4% | -21.3% | -18.5% | -16.5% | -9.8% | 5.1% | 0.104 | -0.463 |
| Mar-10 | -11.2% | -18.9% | -15.4% | -12.3% | -6% | 3.7% | 0.081 | -0.433 |
| Mar-11 | -15.7% | -24% | -19.8% | -16.1% | -11.7% | 1.7% | 0.077 | -0.457 |
| Mar-12 | -23.9% | -32.4% | -28.8% | -24.6% | -20.6% | -3.8% | 0.034 | -0.485 |
| Mar-13 | -16.9% | -27.9% | -24.3% | -19.3% | -13.7% | 0.2% | 0.003 | -0.458 |
| Mar-16 | -26.4% | -37.5% | -32.5% | -29% | -29% | 1.3% | -0.009 | -0.521 |
| Mar-17 | -22.7% | -34.6% | -29.4% | -24.6% | -24.9% | -0.8% | 0.005 | -0.554 |
| Mar-18 | -27.1% | -39.7% | -33.6% | -30.7% | -32% | -3.2% | -0.015 | -0.629 |
| Mar-19 | -26.6% | -37.3% | -32.6% | -30.3% | -31.8% | -3.2% | -0.034 | -0.578 |
| Mar-20 | -29.6% | -38.8% | -33.3% | -30% | -35.2% | -1.6% | -0.02 | -0.614 |
| Mar-23 | -31.6% | -39.7% | -34.4% | -31.4% | -38.2% | 0.6% | 0.024 | -0.618 |
| Mar-24 | -25.1% | -34.2% | -28.5% | -27% | -32.6% | 0.7% | 0.073 | -0.611 |
| Mar-25 | -24.1% | -33.4% | -26% | -24.7% | -29% | 2% | 0.059 | -0.603 |
| Mar-26 | -19.5% | -29.2% | -22.8% | -21.6% | -24% | 2.5% | 0.072 | -0.623 |
| Mar-27 | -22.1% | -31.8% | -25.2% | -25.9% | -23.9% | 3% | 0.065 | -0.649 |
| Mar-30 | -19.7% | -30.3% | -23.7% | -24.8% | -22.3% | 3.2% | 0.07 | -0.67 |
| Mar-31 | -20.8% | -30.6% | -24% | -24.4% | -24.2% | 2.2% | 0.036 | -0.672 |
| Apr-01 | -24.5% | -35.4% | -27.4% | -27.1% | -29.1% | 2.7% | 0.046 | -0.66 |
| Apr-02 | -22.9% | -34.8% | -26% | -25% | -28.9% | 3.2% | 0.063 | -0.598 |
| Apr-03 | -24.2% | -36.6% | -27.4% | -26.4% | -29.9% | 3.2% | 0.068 | -0.539 |
| Apr-06 | -18.9% | -31.8% | -23.5% | -22.8% | -24.7% | 3.5% | 0.098 | -0.573 |
| Apr-07 | -18.8% | -31.6% | -23.1% | -22.3% | -24.1% | 3.6% | 0.092 | -0.604 |
| Apr-08 | -16% | -28.5% | -22.4% | -21.4% | -18.9% | 3.8% | 0.082 | -0.58 |
| Apr-09 | -14.4% | -25% | -20.7% | -21.6% | -14.3% | 5% | 0.11 | -0.612 |
| Apr-13 | -15.4% | -27.1% | -21.3% | -21.3% | -17.9% | 4.6% | 0.13 | -0.618 |
| Apr-14 | -12.9% | -25.6% | -19.9% | -19.7% | -15.6% | 4.6% | 0.138 | -0.641 |
| Apr-15 | -14.9% | -28.6% | -22.5% | -21.5% | -19% | 5.2% | 0.133 | -0.658 |
| Apr-16 | -14.5% | -29.2% | -22.4% | -21% | -19.9% | 5.2% | 0.132 | -0.665 |
| Apr-17 | -12.1% | -26% | -20.2% | -19.7% | -17.4% | 5.1% | 0.11 | -0.678 |
| Apr-20 | -13.5% | -26.9% | -21.4% | -20.3% | -20.4% | 4.9% | 0.118 | -0.703 |
| Apr-21 | -16.2% | -28.7% | -23% | -22.5% | -21.9% | 5% | 0.11 | -0.823 |
| Apr-22 | -14.3% | -27.8% | -21.6% | -20.5% | -20.7% | 5% | 0.132 | -0.822 |
| Apr-23 | -14.3% | -27.1% | -21.7% | -20.8% | -21.3% | 5.1% | 0.143 | -0.789 |
| Apr-24 | -13% | -25.8% | -22.3% | -20.9% | -21.2% | 5.1% | 0.138 | -0.789 |
Monitoring the Coronavirus Pandemic
COVID-19 has had horrific effects on the nation’s health and economy. The fact that we’ve never experienced a situation quite like this has made it especially difficult to forecast what lies ahead. But that won’t stop us from monitoring the trend and trying to anticipate what lies ahead.
An obvious question: Is the US coronavirus outbreak peaking? The answer, unfortunately, is that we don’t know. Not yet. On the bright side, COVID-19 will, eventually, peak and the recovery will begin – for the economy and for the general welfare of the society. In the meantime, we’re looking at data and trying to make informed guesstimates about whether a peak is near or, even better, behind us.
There are many ways to model and analyze the COVID-19 epidemic, but within the confines of a few paragraphs let’s consider one facet of the disease: the daily change in the number of reported fatalities in the U.S. These fluctuations through time provide insight on how the coronavirus is evolving in America, and offers support for our hope that the worst may soon be behind us.
It’ll take several weeks at the least to confirm or reject what appears to be the recent peaking in the trend. In recent days, the spike in daily reported cases earlier this month has been followed with a sharp decline. Will it continue? Or is this another false dawn that will soon lead to a new round of acceleration that brings new highs?
There are many other factors that will determine the timing of a COVID-19 peak for the US. One way to crudely estimate the odds that we’ve seen a genuine peak: the five-day average of reported fatalities relative to the ten-day average (data reported by Johns Hopkins University). Granted, this condition alone is no guarantee. Nonetheless, it’s encouraging that the five-day average has slipped under the ten-day average. This change implies, tentatively, that maybe, just maybe, better days are near.
Caution, however, is still required. As the chart shows, another sharp rise was reported in the daily change for April 23. Perhaps this is noise. But if the five-day average rises above the ten-day average again, the rebound may offer an early clue that the peak has yet to arrive.
The Necessary Variable for Higher Inflation
The radical change in monetary policy this year lays the groundwork for higher inflation at some point, at least in theory. But getting from here to there also requires a reversal in the rise of excess demand for safe and liquid assets.
Since the last recession in 2008-2009, the appetite for cash and its equivalents has been steadily increasing. The net effect: consumers and companies have been holding on to cash at a rate that’s stymied economic growth and kept inflation low.
A proxy for liquidity demand can be found in the velocity of M2 money supply (VoM), defined as the ratio of nominal gross domestic product (GDP) to the average of the money stock. VoM measures the frequency that a dollar is spent to buy goods and services. Higher VoM reflects a higher frequency of spending, which is a critical input for higher inflation. But, as the history of VoM in recent years shows, the net demand for holding money has steadily increased, as indicated by VoM’s descent.
Before the 2008-2009 recession, VoM tended to increase during economic expansions and decline in recessions. But the typical ebb and flow has faded over the past decade. Since the Great Recession ended in 2009, VoM has been trending lower, which reflects the increased appetite for holding cash and its equivalents.
The Federal Reserve has been trying for a decade to reverse VoM’s slide, with limited success. Will the latest round of monetary stimulus change the calculus?
The unprecedented size and scope of the central bank’s liquidity injections to battle the coronavirus blowback is expected to open the door to reflation in the years ahead. That’s a distinct possibility, once the economy recovers in the post-COVID-19 world; although disinflation/deflation for the foreseeable future is the more likely path before reflation has a chance to gain traction.
The big question is whether the velocity of money will rebound when the recession ends? Economic recovery by itself isn’t a catalyst, as the last decade reminds. A major shift in sentiment is also necessary—a shift that’s been lacking over the past ten years.
Investing in Post-Covid-19 World
As forecasts go, this one’s relatively secure: the world will change in numerous ways in the wake of the COVID-19 crisis, including the outlook for investing opportunities.
The Milwaukee Company isn’t in the business of offering speculative market predictions, but as a thought experiment, it’s productive to consider how the future may evolve. For example, technology’s commercial advantages will likely strengthen in the post-crisis world. On several fronts, the promise of breakthrough discoveries in health, business, information management, and other industries suggest that tech, in various forms, will provide the world with crucial solutions to nagging problems in the years ahead.
There will be duds and dead ends, of course—that’s the nature of innovation; namely, trial and error. But on a net basis, using history as a guide, the advances will outweigh and more than compensate for the setbacks.
Consider the potential for biotechnology breakthroughs. From genomics to immunology, the world will increasingly rely on the cutting-edge discoveries from biopharma companies for vaccines, medical treatments, and other health care challenges. Finding these solutions will rely ever more on tech-related applications, such as artificial intelligence to sort through massive amounts of data, and diagnostics to search for silver bullets.
That’s old news, of course, but there’s a renewed recognition in recent crisis of the potential for growth in these industries. That alone doesn’t automatically translate into easy gains. Even great investment opportunities can become overvalued and vulnerable to corrections. But as a general proposition for the long run, the coronavirus fallout has heightened the appreciation of tech and biotech’s role in the 21st economy.
The crowd has certainly remained keen on tech and biotech this year. Consider how two exchange traded funds have fared against a broad stock market; ETF via SPDR S&P 500 (SPY), which has lost 12.8% year-to-date through April 23. By contrast, Technology Select Sector SPDR (XLK), a proxy for the broad tech sector, is off a relatively modest 4.8%. Meanwhile, in the biotech space, iShares Nasdaq Biotechnology (IBB) is ahead so far in 2020, by 2.3%.
A couple of months doesn’t mean much, of course. Then again, the year so far has been extraordinary on multiple fronts, and so recent events offer a degree of stress testing. Does the fact that tech and biotech have delivered relatively impressive results to date in 2020 guarantee big gains going forward? Absolutely not. But whatever the case for these two sectors in the past, recent events provide a basis for renewing optimism on these fronts.
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