Weekly Recap: COVID-19 Market Edition

Ryan NaumanMarket Strategistryan.nauman@informa.com

For the week ending July 24, 2020

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The S&P 500 fell 0.27% during the week as the high-flying tech names struggled while tensions between the U.S. and China continued to escalate.

The week was relatively light on economic data; however, weekly initial jobless claims continue to be the headliner. For the first time since late March, initial jobless claims increased. Claims rose to 1.42 million during the week ending July 18 from 1.31 million the prior week. Furthermore, continuing jobless claims fell to 16.2 million during the week ending July 11 from 17.3 million. After months of declining claims, the increase in initial jobless claims is sure to add worries about the health of the economy as the number of coronavirus cases increased in July.

The second quarter earnings season picked up steam this week. If this cycle follows expectations (y-o-y earnings growth of -45%), it will be the worst quarter for earnings growth since the Great Financial Crisis (GFC). To date, 26% of the S&P 500 companies have reported earnings, with 81% of them beating earnings estimates and 71% beating revenue expectations. Furthermore, the current earnings growth for Q2 sits at -42.4%, which would mark the largest year-over-year decline in earnings since Q4 2008 (-69.1%). The combination of poor forecasted earnings and the equity price rally has pushed the forward 12-month P/E ratio for the S&P 500 index up to 22.2, which is well above the 5-year and 10-year averages. (Source: Factset)

The pandemic has turned people’s daily habits, business operations, global economics, and investment market behavior on their heads during the past five months and there is a good chance these changing dynamics will continue throughout 2020. The Wall Street Journal’s Karen Langley touched on this subject this week in her article titled, “Pandemic Upsets Usual Role of Safety Stocks”.

The coronavirus pandemic has put a wrench into the investment studies and beliefs that have been decades in the making, which investors have become very familiar with. Correlations and diversification principals were put to the test during the early stages of the pandemic. Furthermore, the performance gap between growth vs value has not been this wide since the dot com bubble. More recently, equity sectors that are viewed as relatively riskier investments, such as technology and pharmaceutical sectors, have shifted to become safety plays. Meanwhile, real estate, utilities, consumer staples, and health care sectors, which are traditionally considered safer equity plays, have become risky.

When using beta as the measure of risk, you can see how the risk profiles of these sectors have flipped over the course of the past year due to the coronavirus pandemic. Beta measures the sensitivity of an investment to movements in an underlying benchmark. A beta of 1.0 means an investment moves in lockstep with the benchmark. Investments with a beta of less than 1.0 tend to trail the benchmark in up markets but has downside protection in falling markets. Furthermore, investments with a beta greater than 1.0 tend to be more aggressive and outperform in up markets but tend to underperform in down markets.

Technology stocks, which are the poster child for momentum trades, have now become more of a defensive trade during the coronavirus era. When the coronavirus forced the shutdown of economies across the globe and forced governments to enact “shelter-in-place” mandates, technology and cloud-based companies flourished as consumers purchased goods from ecommerce retailers, subscribed to streaming services, and had to rely on video conferencing apps as they moved to their home offices. These traditionally risky equity plays skyrocketed despite the wide sweeping concerns regarding the economy, the historic rise in unemployment, and uncertainty regarding the virus. For example, during the 12-months before the pandemic really caused havoc (February 20) the beta for the technology sector was 1.34, however, since February 20th, the beta has fallen to 1.09. More so, the beta prior to the pandemic for the pharmaceutical sector was 1.05, however, since the pandemic started, the beta fell to 0.86. Finally, the beta for the communication services sector fell from 1.05 to 0.86.

The opposite is true for conservative sectors. The shelter-in-place mandates forced people to change their spending, shopping, and working habits which hurt traditional defensive/safe plays such as utilities, real estate and consumer staple sectors. Concerns over the real estate sector rose as corporations closed their offices, forcing their employees to work-from-home. The success of working from home has made permanent remote work a viable option for corporations, which has placed pressure on commercial and residential real estate, particularly in densely populated areas. The beta for the real estate sector prior to the pandemic sat at 0.41, however, the beta jumped to 1.09 during the pandemic. A similar story holds true for the utilities sector as the beta for utilities jumped from 0.19 to 0.99.

Commentary

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Sources: Zephyr StyleADVISOR, Macrobond, PSN Enterprise, Bloomberg. 1-week data as of 7/24/20, unless otherwise stated, time periods over 1 week as of 6/30/20. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth –Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth. Fund flow data (EPFR Global) 7/16/20 –7/22/20, S&P 500 (Large Cap Blend flows), Russell 3000 (all U.S. equity flows), Russell 1000 (all Large Cap flows), Russell Mid Cap (all Mid Cap flows), Russell 2000 (all Small Cap flows), MSCI EAFE (Western Europe DM, Asia Pacific DM flows) MSCI EM (All Emerging Market flows), MSCI World (All Developed Markets flows)

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year Flows (mil)S&P 500 -0.27% 20.54% -3.08% 7.51% 10.73% ($1,663)

Russell 3000 -0.28% 22.03% -3.48% 6.53% 10.04% ($3,227)

Russell 1000 -0.28% 21.82% -2.81% 7.48% 10.64% ($4,512)

Russell MidCap 0.22% 24.61% -9.13% -2.24% 5.79% ($391)

Russell 2000 -0.38% 25.42% -12.98% -6.63% 2.01% $418

MSCI EAFE 0.42% 15.08% -11.07% -4.73% 1.30% $783

MSCI EM 0.57% 18.18% -9.67% -3.05% 2.27% ($2,958)

MSCI World -0.08% 19.54% -5.48% 3.40% 7.29% ($828)

1 Mos Value Blend GrowthLarge -0.66% 2.21% 4.35%

Mid 1.13% 1.80% 2.34%

Small 2.90% 3.53% 3.84%

YTD Value Blend Growth

Large -16.26% -2.81% 9.81%

Mid -18.09% -9.13% 4.16%

Small -23.50% -12.98% -3.06%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap 27.07% -12.66% -2.73%

MSCI USA Value 12.95% -16.12% -7.46%MSCI USA Minimum Volatility 12.86% -6.49% 0.03%

MSCI USA Momentum 23.58% 5.19% 12.84%

MSCI USA Quality 19.76% 1.77% 18.26%

MSCI USA Dividend Tilt 15.58% -8.39% 1.78%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate 0.41% 2.90% 6.14% 8.74% 5.32% 1.16

Bloomberg Barclays US High Yield 1.56% 10.18% -3.80% 0.03% 3.33% 6.19Bloomberg Barclays Municipals 10 Yr 0.43% 2.88% 2.47% 4.74% 4.37% 1.09

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

7/24/20 7/17/20 6/30/20 12/31/19 7/24/19 7/24/172-yr U.S. Treasuries 0.14 0.14 0.16 1.58 1.83 1.3710-yr U.S. Treasuries 0.59 0.64 0.66 1.92 2.05 2.2630-yr U.S. Treasuries 1.23 1.33 1.41 2.39 2.58 2.8310-yr German -0.49 -0.48 -0.50 -0.19 -0.40 0.4910-yr Japan -0.01 -0.01 0.03 -0.03 -0.16 0.0710-yr U.K. 0.19 0.19 0.21 0.74 0.68 1.24

Major Fixed Income Asset Class Performance

Rates

Chart of the Week: The Pandemic Has Turned Markets On Their HeadsZephyr StyleADVISOR Zephyr Associates

Sector Beta vs S&P 500Annualized Summary Statistics: Thursday, February 21, 2019 - Thursday, February 20, 2020

Energy Select Sector SPDR® ETF (NAV)

Consumer Discret Sel Sect SPDR® ETF (NAV)

Health Care Select Sector SPDR® ETF (NAV)

Technology Select Sector SPDR® ETF (NAV)

Materials Select Sector SPDR® ETF (NAV)

Utilities Select Sector SPDR® ETF (NAV)

Real Estate Select Sector SPDR® (NAV)

Communication Services Sel Sect SPDR®ETF (NAV)

Industrial Select Sector SPDR® ETF (NAV)

Consumer Staples Select Sector SPDR® ETF (NAV)

Financial Select Sector SPDR® ETF (NAV)

SPDR® S&P Pharmaceuticals ETF (NAV)

S&P 500

Betavs.

S&P 500

1.0897

0.9886

0.8488

1.3437

0.9959

0.1945

0.4130

1.0578

1.0853

0.5401

1.0964

1.0534

1.0000

Annualized Summary Statistics: Thursday, February 20, 2020 - Friday, July 24, 2020

Betavs.

S&P 500

1.3553

0.9370

0.8303

1.0942

1.0315

0.9907

1.0883

0.8655

1.0729

0.7389

1.2435

0.8674

1.0000

COVID-19 Dashboard: The # Of Coronavirus Cases In The U.S. Rises Above 4 Million

Source: Macrobond, World Health Organization 4

Source: Macrobond, World Health Organization 5

COVID-19 Dashboard: Market Volatility Has Returned As Cases Have Increased

Source: Macrobond, Centers for Disease Control & Prevention 6

COVID-19 Dashboard: U.S. Cases Climb Higher Driven By Increases In The South & West

7Source: Macrobond, World Health Organization, Citi

COVID-19 Dashboard: Citi Macro Risk Index Has Fallen As COVID-19 Cases Have Increased

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Markets: The Pandemic Has Turned Markets On Their Heads

Zephyr StyleADVISOR Zephyr AssociatesSector Beta vs S&P 500Annualized Summary Statistics: Thursday, February 21, 2019 - Thursday, February 20, 2020

Energy Select Sector SPDR® ETF (NAV)

Consumer Discret Sel Sect SPDR® ETF (NAV)

Health Care Select Sector SPDR® ETF (NAV)

Technology Select Sector SPDR® ETF (NAV)

Materials Select Sector SPDR® ETF (NAV)

Utilities Select Sector SPDR® ETF (NAV)

Real Estate Select Sector SPDR® (NAV)

Communication Services Sel Sect SPDR®ETF (NAV)

Industrial Select Sector SPDR® ETF (NAV)

Consumer Staples Select Sector SPDR® ETF (NAV)

Financial Select Sector SPDR® ETF (NAV)

SPDR® S&P Pharmaceuticals ETF (NAV)

S&P 500

Betavs.

S&P 500

1.0897

0.9886

0.8488

1.3437

0.9959

0.1945

0.4130

1.0578

1.0853

0.5401

1.0964

1.0534

1.0000

Annualized Summary Statistics: Thursday, February 20, 2020 - Friday, July 24, 2020

Betavs.

S&P 500

1.3553

0.9370

0.8303

1.0942

1.0315

0.9907

1.0883

0.8655

1.0729

0.7389

1.2435

0.8674

1.0000

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Markets: Despite All The Turmoil, The S&P 500 Is Positive YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, July 24, 2020 (Single Computation)

65

70

75

80

85

90

95

100

105

110

Jan 01, 2020 Jan 28, 2020 Feb 24, 2020 Mar 19, 2020 Apr 15, 2020 May 11, 2020 Jun 05, 2020 Jul 24, 2020

S&P 500

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Markets: The S&P 500 Is 4.4% Away From Its High-Water Mark

Zephyr StyleADVISOR Zephyr AssociatesThursday, January 2, 2020 - Friday, July 24, 2020

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%0%

Jan 01, 2020 Jan 30, 2020 Feb 28, 2020 Mar 27, 2020 Apr 28, 2020 May 28, 2020 Jul 24, 2020

S&P 500MSCI EAFEMSCI EM (EMERGING MARKETS)Gold London PM FixingRussell 2000

Thursday, January 2, 2020 - Friday, July 24, 2020: Summary Statistics

S&P 500

MSCI EAFE

MSCI EM (EMERGING MARKETS)

Gold London PM Fixing

Russell 2000

S&P 500

MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

Max Drawdown

Recovery DatePainIndex

PainRatio

High WaterMark Date

To HighWater Mark

-33.79% Feb 20, 2020 Mar 23, 2020 23 N/A 10.06% 0.03 Feb 19, 2020 4.43%

-33.86% Jan 21, 2020 Mar 23, 2020 44 N/A 12.69% -0.60 Jan 17, 2020 8.65%

-33.71% Jan 21, 2020 Mar 23, 2020 44 N/A 13.24% -0.32 Jan 17, 2020 6.35%

-12.44% Mar 9, 2020 Mar 19, 2020 9 Apr 14, 2020 1.83% 13.65 Jul 24, 2020 0.00%

-41.72% Jan 17, 2020 Mar 18, 2020 42 N/A 16.55% -0.71 Jan 16, 2020 15.33%

-33.79% Feb 20, 2020 Mar 23, 2020 23 N/A 10.06% 0.03 Feb 19, 2020 4.43%

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Markets: The Basic Materials Sector Is +58%, While Tech And Oil & Gas Sectors Are +50% Since March 23

Zephyr StyleADVISOR Zephyr Associates

Monday, March 23, 2020 - Friday, July 24, 2020 (not annualized if less than 1 year)

Ret

urn

0

10

20

30

40

50

60

AnalysisPeriod

Dow Jones U.S. Basic MaterialsDow Jones U.S. TechnologyDow Jones U.S. Consumer ServicesDow Jones U.S. Oil & GasDow Jones U.S. CompositeDow Jones U.S. Consumer GoodsDow Jones U.S. IndustrialsDow Jones U.S. Health CareDow Jones U.S. FinancialsDow Jones U.S. UtilitiesDow Jones U.S. TelecommunicationsS&P 500

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Markets: Chinese Equities Are +11% YTD, While S&P 500 is +0.62%

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, July 24, 2020 (not annualized if less than 1 year)

Return

-30 -20 -10 0 10 20

YTD

MSCI ChinaMSCI SwitzerlandMSCI JapanMSCI KoreaMSCI CanadaMSCI GermanyMSCI AustraliaMSCI United KingdomMSCI RussiaMSCI ItalyMSCI SpainMSCI MexicoMSCI BrazilS&P 500

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Markets: Haven Treasuries Continue to Outperform YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, July 24, 2020 (not annualized if less than 1 year)

Ret

urn

0

2

4

6

8

10

12

YTD

Barclays U.S. Treasury: 7-10 YearBarclays U.S. AggregateBarclays U.S. Corporate Investment GradeBarclays U.S. Treasury: 1-3 YearBarclays Municipal BondBarclays Global x US BondBarclays U.S. Corporate High Yield

14

Markets: All Four Portfolios Are Now Positive YTD

Zephyr StyleADVISOR Zephyr AssociatesThursday, January 2, 2020 - Friday, July 24, 2020 (Single Computation)

75

80

85

90

95

100

105

110

Jan 01, 2020 Jan 28, 2020 Feb 24, 2020 Mar 19, 2020 Apr 15, 2020 May 11, 2020 Jun 05, 2020 Jul 01, 2020 Jul 24, 2020

20% S&P 500/80% Bloomberg Barclays Agg 40% S&P 500/60% Bloomberg Barclays Agg 60% S&P 500/40% Bloomberg Barclays Agg 80% S&P 500/20% Bloomberg Barclays Agg

Blend WeightsAs of July 24, 2020

20% S&P 500/80% Bloomberg Barclays Agg 40% S&P 500/60% Bloomberg Barclays Agg

60% S&P 500/40% Bloomberg Barclays Agg 80% S&P 500/20% Bloomberg Barclays Agg

80.9%

19.1%

38.6%

61.4%

41.4%

58.6%

79.0%

21.0%

S&P 500Barclays U.S. Aggregate

Source: Macrobond, BEA 15

Economy: Q1 GDP Falls to ‘08 Levels While Shrinking Services Consumption Is The Biggest Culprit

Source: Macrobond, Citi 16

Economy: The Citi Economic Surprise Index Has Spike As Economic Data Has Surprised Economists

Source: Macrobond, U.S. Department of Labor, BLS, BEA 17

Economy: Unemployment Claims Climb Above 52 Million Over The Past 18 Weeks, While The Unemployment Rate Falls

Source: Macrobond, IHS Markit 18

Economy: The Manufacturing PMI Shows Optimism While The Services PMI Continues To Rebound

Source: Macrobond, Federal Reserve 19

Fiscal Policy: The Fed’s Balance Sheet Shrinks Below $7 Trillion

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All Eyes On……..

Day Event/Earnings

Monday, July 27

U.S. Durable Goods Orders (June)

Tuesday, July 28

U.S. Case-Shiller National Home Price (May), Consumer Confidence Index (July) Advanced Micro Devices, Inc., Visa Inc., Pfizer Inc., Altria Group, Inc., Starbucks Corporation, McDonalds Corporation, Amgen Inc., 3M Company

Wednesday, July 29

U.S. Pending Home Sales (June), FOMC AnnouncementFacebook, Inc., General Electric Company, The Boeing Company, General Motors, Shopify Inc.

Thursday, July 30

U.S. GDP (Q2), Initial Jobless Claims (July 25)Apple Inc., Amazon.com, Inc., Ford Motor Company, Alphabet Inc., Mastercard Incorporated, Gilead Sciences, Inc., Procter Gamble Company, Eli Lilly And Company

Friday, July 31

U.S. Personal Income (June), Consumer Spending (June), Core Inflation), Chicago PMI (July), Consumer Sentiment Index (July) Abbvie Inc., Exxon Mobil Corporation, Caterpillar Inc., Merk Co., Inc Chevron Corporation

The week ahead is one of the busiest weeks of the Q2 earnings season which includes some of the largest and most popular traded companies. The releases that I am particularly intrigued by are Apple, Amazon.com, Alphabet and Caterpillar.

As for economic data, the first iteration of second quarter GDP will be released, which is expected to show the worst contraction in economic growth since the Great Financial Crisis. The additional item I will be closely watching and listening towill be the FOMC meeting announcement and Chairman Powell’s follow-up press conference. Very few expect the FOMC to make adjustments to its monetary policies, however, their comments about the future path of their policies, the health of the U.S. economy, and the end of the CARES Act will be closely watched.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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