Erik Ristuben

News is an interesting concept, in that information really only counts as news if it’s unexpected. On the flip side, information isn’t news if it is expected. April, however, is showing that even when the expectation is for bad news, the cumulative effect of so much negativity can still weigh on markets heavily. In other words, just expecting bad economic data does not necessarily make the market invulnerable to mountains of it.

Broadly speaking, the economic and earnings data in most of the world is heading in the wrong direction, although in China—where the virus first surfaced—the data is now trending in the right direction.

However, when it comes to the path of the coronavirus itself, more positive news continues to emerge. In Europe, for example, it seems clear that the curve is flattening in the hardest-hit countries of Italy and Spain, while other European nations like Germany, France and Belgium are showing signs that the growth rate of the viral outbreak is slowing. While there continues to be daily ebbs and flows in the numbers, the trend toward an overall slowdown now appears to be in place. In addition, all evidence indicates that social distancing is having the desired effect of limiting the virus’ spread.

This is also the case in the U.S. Although America now leads the world in the number of coronavirus infections and deaths, the curve is flattening. Estimates for the total number of deaths that will occur in the U.S., although tragically large, are now beginning to drop from the worst-case scenarios. Of course, the ultimate path of the virus remains very difficult to forecast, and there is the very real chance that the outbreak could occur in waves. That said, the fact that governments around the world are actively discussing plans to reopen their economies, as China has done, is a very promising sign.

So far, in the U.S., over 16 million people have filed for unemployment in the last three weeks alone, with the likelihood that millions more will be joining them this week. Today, we learned that retail sales collapsed in March as the effects of social distancing wreaked havoc on retailer shops, restaurants and gas stations, to name a few.

Earnings season is also following suit, with most companies expected to report lower earnings in the first quarter, accompanied by negative guidance about upcoming earnings. The net effect of this in early trading today has been negative, but as we have said repeatedly, volatility will be the markets’ travelling companion for some time to come.

Pushing against this wave of negative economic news is an increasingly larger global fiscal response. Just late last week, Japan and the European Union announced even more support. Meanwhile, in the U.S., the $1,200 direct deposits to lower and middle class wage earners are going out this week, while the first small business loan program applicants started to receive wire transfers on Monday. Although these programs are far from perfect, they are enormous in scope and demonstrate that real relief—especially to the hardest hit participants in the U.S. economy—is beginning to arrive.

Over the next month or so, markets are likely to be caught in a tug-of-war between hopefully good news—as it relates to the flattening of the viral outbreak curve—versus bad news pertaining to economic data. With this in mind, the only real news is likely to be hopeful signs that point to the outbreak slowly abating. The bad economic data is going to come regardless.

By Erik Ristuben

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Can the market’s psyche handle the downgrade?
As markets open for Monday trading on 8 August 2011, investors’ eyes will alternate focus between global bond and equity markets to gauge reaction to Friday’s announcement by S&P that US Treasury debt is no longer among the safest investments in the world.

Our view is that recent negative market volatility reflects a drop in confidence in response to a spate of negative headlines – not a global economic collapse. Our analysis of the facts leads us to believe that although the economy has been weakened, a “double-dip” recession still remains unlikely.

Eyes fixed on fixed-income
We’ve been watching reactions to the downgrade through the weekend, and we don’t think the bond market is looking to S&P to determine what US Treasuries are worth. In fact, last week’s drop in Treasury yield – which reflected a flight to safety – gives us a good indication that there is no significant concern about America’s ability to service and repay its debt. Our current thinking is that the bond market reaction to S&P will likely be muted.

The downgrade does raise technical concerns regarding capital requirements for banking, insurance, derivatives and money funds, but the Fed, other regulators and governments in Europe and Asia have strongly stated that the risk weighting for US Treasuries in capital structures “remains unchanged.” Although it’s impossible to be completely certain how yields will react there is reason to believe, based on recent history, that Friday’s downgrade will not necessarily prolong the current weak patch in the US economy. Russell still forecasts roughly 2.5% in US GDP growth in the back half of this year.

Equities
The wildcard is the equity market. As of this writing on Sunday, however, the announcement is two days old and many nations have come out in support of the value and safety of US Treasuries. We’ve seen a measured response in the US futures market, and early futures activity in the Asia Pacific market indicates a negative open to the markets but not full-out panic.

Russell is cautiously optimistic that we will not see an emotional reaction in the equity markets on Monday. Certainly the S&P downgrade won’t do anything to help speed the economic recovery, which has been weaker and slower than we would have hoped, and we anticipate that traumas such as those experienced last week will be a regular “companion” of the recovery.

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