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May 2020 Market Commentary: Digging Out Of A Deep Hole

Jun. 04, 2020 12:47 PM ETAGG, ACWI


  • Global stocks continued their 2nd quarter recovery from the steep 1st quarter sell-off.  Global markets as represented by MSCI All-Country World Index, or ACWI, were up 4.3% in May.
  • Despite some early month weakness driven by cautious comments from famed investors (Warren Buffett, Stanley Druckenmiller, David Tepper), global equities rallied over positive COVID-19 vaccine developments.
  • Europe and Japanese markets performed well over increased pandemic relief measures.
  • U.S. small caps had briefly outperformed large caps up until the last week when the markets had pulled back due to the escalating tensions with China.
  • Fixed income posted another positive month,helped by the continued recovery in corporate credit and mortgage-backed/asset-backed sectors.

Data Source: Bloomberg

COVID-19 (Coronavirus) and Digging Out of the Deep Hole

Source: istockphoto.com

"A friend once observed that if you dig yourself a deep hole, and emerge partially, you are still in a deep hole. It will be a while before we are back on level ground." - Northern Trust Weekly Economic Commentary, 6/1/2020

The above quote comes from Northern Trust's economics team, who are adopting a cautious tone when it comes to interpreting recent improvement in economic data and activity as investors look for signs of a recovery from the coronavirus-driven global recession. Whether an uptick in air passenger traffic, improvements in manufacturing/business sentiment, or a slowdown in U.S. jobless claims, such positive 'changes-at-the-margin' need to be soberly viewed within a context of a COVID19-driven deep hole economic contraction with US Q2 GDP expected to decline at an annualized rate of 50% (according to the latest GDPNow forecast) and the U.S. unemployment rate expected to reach 20%. The sudden and sharp decline in economic growth, not seen over the post-World War II period, is a hole that will likely take years to dig out of.

So, where are we seeing improvements at the margin even if these measures still remain deep in the hole? Transportation (air, car, train) activity is picking up both in the U.S. and China. Figure 1 displays an interesting chart that combines Apple (AAPL) mobility signals with gasoline usage as a lagged variable. Such tracking data appears to be pointing towards a recovery, although this will be influenced by the level of shelter-in-place rollbacks at the state level. Similar upticks in activity can also be observed across China, although China is seeing a rise in new COVID-19 cases.

Figure 1 - Tracking Data Points Toward a Recovery in Auto Transportation Usage

U.S. small business sentiment

This article was written by

Benjamin M. Lavine, Co-Chief Investment Officer at 3D/L Capital Management, is an investment professional with 20 years of experience in asset management and institutional consulting. Ben brings a versatile investment background and knowledge set having served as a portfolio manager on the developed markets equity team at Batterymarch Financial Management and as a vice president in the Funds Management Division at Wilshire Associates. Ben brings expertise in the following areas: Global Quantitative Equity Research and Management, Macro Investment Strategy, Institutional Product Management and Development, and Institutional Consulting and Public Markets Fund-of-Funds Ben received his MBA from UCLA’s Anderson School of Management, holds the CFA designation, and has experience working on data platforms including Bloomberg, Factset, MATLAB, Orion Technologies, and Thomson/Reuters.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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