May 2020 Market Update: Stocks stage rebound as U.S. enters recession

Thrivent Asset Management Contributors to this report: Mark Simenstad, CFA, Chief Investment Strategist; Darren Bagwell, CFA, Chief Equity Strategist; Steve Lowe, CFA, Vice President, Mutual Funds-Fixed Income; John Groton, Jr., CFA, Director of Equity Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Senior Investment Product Manager

Banking on hopes that the economy will ultimately make a strong recovery, the stock market staged a robust rebound in April, with the S&P 500® surging 12.68% for the month.

The rebound in stock prices came as other areas of the economy dropped to recession levels amidst the global COVID-19 pandemic. Gross Domestic Product (GDP) contracted by 4.8% in the 1^st quarter, which officially marked the start of a recession, according to the Bureau of Economic Analysis.

The surge in stock prices reflected an optimism among investors that the massive stimulus packages approved by Congress would help buoy the economy, and that the nation and the world would ultimately recover from the effects of the pandemic, precipitating a strong economic recovery.

Through the end of April, the S&P 500 was nearly at the same level as it had been one year earlier. It ended the month at 2,912.43, down just 1.13% from its April 30, 2019 level of 2,945.83. While the timing of an economic recovery is impossible to predict, it could encompass nearly every aspect of the economy.

But getting back to previous levels will require a very strong rebound. For instance, GDP growth in the 1^st quarter of 2019 was a solid 3.1% versus negative 4.8% in the 1^st quarter of 2020. Unemployment a year ago was at 3.8%, which marked the lowest level in 50 years, while unemployment today is approaching the highest level since the Great Depression. The S&P 500 12-month forward corporate earnings projection a year ago was $174.43 compared with $145.22 at the close of April this year. And oil is currently trading at slightly less than one-third of its price of a year ago. West Texas Intermediate (WTI), a grade of oil that serves as a benchmark in oil pricing, was at $63.91 a barrel a year ago compared with just $18.84 at the April close this year.

Once the nation begins to recover from the pandemic, GDP growth should start to recover, employment should pick up, corporate earnings should reverse course, and auto and airline travel should begin to approach previous levels, driving up the price of oil.  In the meantime, investors should expect to experience some volatility in the stock market as the recovery moves through various phases. 

See: Why active management now? It made a difference in last two market crashes

Drilling down

U.S. stocks rebound

The S&P 500 was up 12.68% in April, from 2584.55 at the end of March to 2912.43 at the April close.  (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.) The total return of the S&P 500 (including dividends) was 12.82% for the month of April.

The NASDAQ Index was up 15.45% for the month of April. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales fall 

According to the Department of Commerce retail report issued April 15, retail sales dropped 8.7% from the previous month in March and 6.2% from March 2019. Results for April and May are expected to be even worse, as most retail stores throughout the country have been closed due to the lockdown.

Automobile sales were down 25.6% from the previous month in March and down 23.7% from a year earlier. Clothing sales were down 50.5% from the previous month and down 50.7% from a year earlier. Food services and drinking places were down 26.5% from the previous month and down 23.0% from a year earlier. On the bright side, grocery store sales were up 26.9% from the previous month and up 29.3% from a year earlier. Non-store retailers (primarily online) were up 3.1% from the previous month and 9.7% from a year earlier.

Unemployment claims mount

With massive layoffs across a number of key sectors, unemployment claims continued to skyrocket, according to the U.S. Department of Labor (DOL). Since the impact of the pandemic began to take effect in March, 30.3 million Americans have filed unemployment claims through April 30. Most of the unemployed workers are from the hospitality, food services, and retail sectors, although many other industries have also added to the unemployment numbers due to business slow-downs.

GDP growth goes negative

Gross Domestic Product (GDP) declined by 4.8% in the 1^st quarter, according to the Bureau of Economic Analysis in a report issued April 29. That compares to a 2.1% rate of growth in the 4^th quarter of 2019. According to the report, the decrease “reflected negative contributions from personal consumption expenditures, nonresidential fixed investment, exports, and private inventory investment that were partially offset by positive contributions from residential fixed investment, federal government spending, and state and local government spending.”

All sectors rebound in April 

All 11 sectors of the S&P 500 made gains in April, led by the Energy sector, which was up 29.78%, although the sector is still down 35.70% for the year. Other leading sectors include Consumer Discretionary, up 20.55%, and Materials, up 15.31%.

The chart below shows the results of the 11 sectors for the past month and year-to-date: 

Treasury yields keep falling 

The declining yield on 10-year U.S. Treasuries continued to set new all-time lows in April. After closing March at 0.68% – the lowest yield since the government began offering bonds in 1790 – the yield continued to decline in April, ending the month at just 0.62%. The drop was attributed to two significant cuts in the Fed funds rate by the Federal Reserve and to an increase in bond demand as investors sought a safe haven amid the market turbulence.

Oil prices continue to decline

Oil prices continued to drop in April, as global travel slowed to a crawl and a glut in oil supply continued to grow. West Texas Intermediate dropped 8.01% for the month, falling from $20.48 per barrel at the end of March to $18.84% at the end of April. So far this year, oil prices have dropped 69.15% from the 2019 closing price of $61.06 per barrel. (See: Gasoline prices drop under $2 as drivers stay home)

International equities rebound

The global stock market made a small recovery in April after dropping significantly in March. The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia and Australia, was up 6.29% in April, but is still down 18.62% year-to-date.

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Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com