Before we can hope to see a turn for the better, we must first see signs of stabilizing. For the most part, this is what we see in the most recent data. We try to discern the path to recovery in the week-to-week data: virus trends, by looking at cases and deaths across the United States; economic trends, by looking at mobility and reports of real economic activity; and market trends, by looking at the response of key financial indicators. This week’s analysis showed us that the economic hole is deep, but the rate of falloff is slowing.

Slowing Spread

New York reported fewer hospital admissions last week and nationwide cases rose 3.5% versus 3.8% the week before. The Covid-19 nationwide death toll is over 50,000 and the United States is now the epicenter of the pandemic. The number of deaths climbed by 37% in the week ended Friday, compared to a 97% increase the prior week. The weekly rate continues to abate (chart, below). Slowing the spread of the virus is an essential first step in recovery.

U.S. Coronavirus Deaths — Weekly Growth Rate (%)

Real Economy

The real economy is suffering its sharpest slowdown in a generation. The United States so far has lost 26 million jobs during this lock-down. Last week, unemployment claims declined to 4.4 million from 5.2 million the week prior. But the mounting job losses are exacting a harsh toll. Consider that if weekly claims average just 1-3 million per week over the next five weeks, total additional job losses would be between 5-15 million more, bringing total losses to 30-40 million. This translates to an unemployment rate of 20-25%, a level not seen since the early 1930s. But unlike that period, many of the job losses are expected to be temporary (furloughs), unemployment insurance and additional payments are available through newly enacted programs, and the Federal Reserve is very accommodating.

Measures of activity and movement are down, but flattening. The number of total U.S. flights increased by 4% last week (down 60% overall), and transit hub mobility was flat (down 77% overall). Weekly retail sales fell 6.9% and flat rolled steel output was level at 1.28 million tons, down a third since February. The New York Federal Reserve Weekly Economic index hit a record low of -11.7, down 1.3 points for the week. We estimate the U.S. economy is presently contracting at an annualized rate of -16 to -24% based on this data.

Oil Shocker

U.S. oil demand is down 22% and supply, measured as days supply available, is up 45% since February. Falling demand and surging supply is behind a 70% drop in crude prices. West Texas Intermediate crude futures prices actually fell to -$38 for one month delivery on April 20 because of a shortage of storage! This shocking development is battering the U.S. energy industry, further compounding pain in energy dependent states like Texas, Oklahoma, and North Dakota.

Signs of stability are starting to emerge in the depth of a very harsh virus and shutdown induced recession. The path to overcoming the threat of the coronavirus must pass through a phase of repressed social and economic activity. The toll for which is a very pronounced and unexpected hit to the global economy. We continue to recommend a balanced approach and emphasis on quality as the best way to navigate this most challenging environment. 

Portfolio Positioning

CONQUEST portfolios remain tactically underweight equities in keeping with our updated WCA “Recovery Tracker” (chart, below). Portfolios are also overweight U.S. vs. Emerging Markets, overweight gold vs. high yield, and we are overweight value versus growth based on valuation. Equity portfolios continue to emphasize quality, dividend growth, and value.

WCA “Recovery Tracker”

The new weekly “WCA Recovery Tracker” (chart, below) places roughly 30% weight on coronavirus trends, 30% on financial market trends, and 40% weight on real economic trends. Readings above 50 will be considered positive, and below 50 negative. We will be updating this every week or two and use the barometer as a tool to discern trends, plot the shape of recovery, and help guide the short-term tactical positioning of CONQUEST portfolios.


Disclosures:

WCA Barometer – We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. Analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.

Standard & Poor’s 500 Index (S&P 500) is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.

S&P Global (SPGI) is a leading American provider of financial information, analytics, and credit ratings, headquartered in New York, NY. It operates major divisions including S&P Global Ratings, S&P Global Market Intelligence, S&P Global Commodity Insights, S&P Global Mobility, and S&P Dow Jones Indices.

The ICE BofA U.S. High Yield Index is an unmanaged index that tracks the performance of U.S. dollar denominated, below investment-grade rated corporate debt publicly issued in the U.S. domestic market.

The S&P 500 Growth measures constituents from the S&P 500 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum.

The S&P 500 Value Index measures constituents from the S&P 500 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.

The S&P 500 Equal Weight Index is the equal-weight version of the widely regarded Standard & Poor’s 500 Index, which is generally considered representative of the U.S. large capitalization market. The index has the same constituents as the capitalization-weighted S&P 500, but each company in the index is allocated a fixed weight of 0.20% at each quarterly rebalancing.

The WCA Rising Dividend Custom Benchmark is a rules-based benchmark constructed by Washington Crossing Advisors to represent a universe of large capitalization U.S. companies that meet certain quality and dividend growth criteria, including proprietary screens for profitability, earnings consistency, and balance sheet strength, along with minimum market capitalization and dividend growth requirements. The benchmark is reconstituted and rebalanced quarterly and is intended to serve as a style-appropriate benchmark for the WCA Rising Dividend strategy.

The Washington Crossing Advisors’ High Quality Index and Low Quality Index are objective, quantitative measures designed to identify quality in the top 1,000 U.S. companies. Ranked by fundamental factors, WCA grades companies from “A” (top quintile) to “F” (bottom quintile). Factors include debt relative to equity, asset profitability, and consistency in performance. Companies with lower debt, higher profitability, and greater consistency earn higher grades. These indices are reconstituted annually and rebalanced daily. For informational purposes only, and WCA Quality Grade indices do not reflect the performance of any WCA investment strategy.

The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio relative to the market as a whole. A beta of one is considered as risky as the benchmark and is therefore likely to provide expected returns approximate to those of the benchmark during both up and down periods. A portfolio with a beta of two would move approximately twice as much as the benchmark.

Standard deviation is a measure of the volatility of a security’s or portfolio’s returns in relation to the mean return. The larger the standard deviation, the greater the volatility of return in relation to the mean return.

Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments

This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.

Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.