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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Highlights

  • Equity markets surged on Monday and major indices finished up more than 10% in the shortened week. Markets were driven by public health news and the Federal Reserve’s announcement of new support for mid-size businesses, the fixed-income market, and state and municipal governments. Markets are likely to continue exhibiting volatility in the weeks ahead given how little clarity exists on both the health and economic fronts.
  • U.S. policymakers indicated their intention to provide additional assistance to small businesses and the Japanese government announced a massive stimulus package as governments strive to contain economic damage from the global shutdown.
  • The latest data on U.S. unemployment claims and consumer sentiment continued to reveal the depth of the current economic challenge. Looking ahead, markets are expecting weak corporate earnings reports, which will likely provide more information about global economic conditions. Investors should consult with their financial professional about navigating the current environment and staying focused on long-term goals.

Markets Perk Up, Clarity in Short Supply

The holiday-shortened week saw a rise in U.S. markets. The positive momentum corresponded with news that some of the states and countries hardest hit by COVID-19 may be reaching plateaus in the number of cases they’re experiencing. Markets were also buoyed by the Fed’s announcement of additional stimulus. However, there is still great uncertainty about the health outlook and the economy, so market volatility will continue.

  • Equity markets rose strongly to open the week and carried gains through to the week’s end. The S&P 500 has now recovered nearly half its losses from the market peak on February 19 to the low on March 23, though the index remains down 13.7% for the year.
  • Fixed-income markets have shown signs of improvement and reduced stress as the Fed has bought assets and made more dollars available around the world. On Thursday, the Fed announced another $2.3 trillion program to support lending to mid-sized businesses and state and municipal governments.
  • Oil prices fluctuated widely this week as investors anticipated the outcome of Thursday’s meeting of major oil producers. After markets closed, producers announced an agreement to cut production by 10 million barrels per day in May and June, with lesser reductions planned into 2022.
  • Across asset classes, markets will continue to show upside and downside volatility as uncertainty about economic conditions and the public health outlook remain high.

Governments Stimulate Economies in the Face of Recession

  • Early readings on first quarter economic growth are showing pronounced deceleration, with negative growth expected in the second quarter. Governments around the world are taking broad and unprecedented steps to provide economic relief and stimulate their economies.
  • The U.S. government’s small business lending program had some trouble getting its footing this week. Demand for funds is high, prompting Congress and the Trump Administration to discuss making additional funding available. The lending program announced by the Fed on Thursday may also help some small businesses.
  • The Japanese government announced a mega stimulus plan this week that is approximately 20% of Japan’s GDP. Meanwhile, the Bank of France said the country’s economic growth dipped 6% in the first quarter, putting France’s economy in recession. Economists in Germany are also expecting a recession this year. These are stark reminders that the economic downturn and eventual recovery will be shaped by events in many markets.

Economic Data Shows the Extent of the Challenge

U.S. economic data this week provided additional perspective on the global shutdown’s impact on the domestic economy.

In the U.S., Thursday’s initial jobless claims report showed that 6.6 million people filed a new claim for unemployment benefits last week. The prior week’s figure was also revised upward, bringing the three-week total to nearly 16.8 million. (By comparison, the same three-week period last year saw a total of 630,000 new jobless claims.) Markets will be looking to see how long it takes for this number to peak.

  • The University of Michigan’s monthly report on U.S. consumer sentiment dropped to 71 from last month’s 89.1. This is the steepest one-month decline ever recorded and the index is now at a level it hasn’t seen since 2011.
  • Many corporate earnings reports are scheduled to come out in the next few weeks. Markets are expecting weak earnings from the first quarter, and many companies have already announced that they will not be providing forward-looking guidance on performance. The reports will be worth watching to see what they reveal about conditions in various parts of the economy. How markets react to these revelations will provide a window into investor sentiment.
  • Amid high levels of volatility and uncertainty, individual investors should consult with their financial professional about the current environment and how best to plan for their long-term goals.

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