Markets Rally Despite Negative Economic News
We are now beginning to enter the period in which data will be released and shed light on the impact of COVID-19 on the economy and corporate earnings. U.S. GDP growth numbers will be released at the end of the month, but other countries have already started to release their figures.
China just announced that their economy contracted by 6.8% last quarter when compared to a year ago, coming in lower than the negative 6.5% analyst polled by Reuters initially thought.[i] Normally the range around the expected GDP growth is not wide. However, this time around the forecast was as low as negative 28.9% to as high as 4%, which goes to show how difficult it is to predict the economic damage caused by COVID-19. As of now, U.S. GDP is expected to contract 2.5% for the first quarter and decrease 25.1% in the second quarter and rebound in the third and fourth quarter.[ii]
To gauge how bad the unemployment situation has been lately, analyst have focused on the weekly jobless claims numbers because they are timelier than the monthly figures. Since social distancing measures took effect last month, a little more than 22 million jobs have been lost, almost erasing all of the new jobs created during the latest economic expansion.[iii] Unemployment is expected to rise from the mid-three percent number prior to COVID-19 to about 15 percent.
So why have the markets been rallying over the last few weeks? The answer is because markets are forward looking and have already discounted the expected bad data. If you recall, the markets peaked February 19th and sold off 33.9% to the March 23rd lows. This rapid market decrease was in anticipation of the bad data that is just now being released. On the flipside, the S&P 500 is now up 25.1% from the lows until Thursday’s market close because things may not end up being as bad as initially thought. Just a couple of weeks back, it was said that deaths from COVID-19 in the U.S. would reach 200,000 and now that figure is much lower. Since the markets are looking to what is likely to happen over the next few months, it has increased because there are signs things might get better faster and with less of a negative impact than initially forecasted.
We will continue to monitor the data as it is released and make any necessary adjustment if the data comes in worse than forecasted. Earnings season has begun, and it will be especially important to see how corporate earnings are impacted and how companies plan to navigate through this uncertain environment. We have positioned our portfolios toward companies with strong balance sheets, high margins and a strong cash reserve; these are the types of companies that will be able to weather the storm.