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Posted May 8, 2020

For investors, April could not have been more different than March. As measured by the Russell 3000, the US stock market rose by 13% for the month of April and has increased 31% from the March 23rd bottom. While US stocks are still down 15% from their February 19th high, April brought a welcome rebound. To understand this rebound, it is helpful to reflect on the frequent disconnect between newly released economic data and the behavior of the stock market.

While economic data measures the recent past, stock markets assess the future. In late February, for example, the US stock market began to decline in anticipation of trouble. At that time, US economic data still looked very strong. This same disconnect also explains why markets recover ahead of the economy. Now, the advanced estimate of first quarter 2020 GDP is -4.8% on an annualized basis, or about -1.2% in absolute terms. Weekly jobless claims continue to show millions of new claims each week since the coronavirus restrictions began, with total job losses estimated to be around 30 million. In a first, oil prices briefly turned negative, as increased output from countries like Russia and Saudi Arabia coupled with dramatically reduced consumption overwhelmed storage capacity. But the stock market rose in anticipation of a better tomorrow and an expectation that conditions would improve.

Why does the market expect that conditions will improve? First, anticipated near-term relaxation of coronavirus-driven lockdowns give hope that the global economy will begin to reopen. While our own Bay Area shelter-in-place order has been extended to May 31st, many parts of the country are starting to reopen, as have some parts of countries such as Italy and Spain. Second, there is growing evidence that society can successfully avoid the worst-case coronavirus outcomes without requiring a second round of lockdowns. Measures such as hand washing, sanitation of common areas, prohibitions on mass gatherings, and increased spacing between customers have shown promise in other regions of the world. Applying these measures have allowed certain regions to avoid or end severe lockdowns without overtaxing their hospital systems. There is hope that drug treatments such as Remdesivir will continue to be studied and fine-tuned to reduce the number of severe or fatal outcomes from the coronavirus.

Still, the level of uncertainty around the speed of economic recovery is substantial. Perhaps frustrated by this uncertainty and the disconnect between economic data and the stock market, financial institutions are considering alternative sources of data to measure the potential post-lockdown recovery. These statistics include rush hour highway congestion levels, retail foot traffic in shopping centers, air pollution, and web search trends for coronavirus symptoms. While such alternative data rarely appears in financial headlines, much of it is updated daily and provides quicker, if less thorough, clues about the health of the economy. Compare that to GDP numbers, which are only published quarterly.

It would be nice to believe that April marked the end of volatility for the time being, but with this much uncertainty surrounding the timing and magnitude of an economic recovery, we do not expect this to be the case. The COVID-19 virus has taken investors on a wild ride that will likely continue, with each month being different from the last. As light appears at the end of the tunnel for shelter-in-place orders, attention will focus on new infection rates and consumer behavior. Our continued advice to our clients is to stay safe, stay patient, and stay consistent with the investment strategy that supports your financial plan. Please reach out if we can be of help.

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