How much negative news have markets already priced in?

On a special, remotely recorded edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Head of AIS Business Solutions Sophie Antal Gilbert discussed key economic data releases and the latest readings on consumer confidence, as well as recent market performance.

Why the March ISM numbers don’t tell the full story

The Institute for Supply Management (ISM)’s manufacturing index slipped to a level of 49.1 in March, down from 50.1 in February, Roach said. A reading above 50 indicates expansionary conditions, while a reading below 50 points to contractionary conditions. While the manufacturing index showed a decline, it likely didn’t capture the full brunt of the fallout from global containment measures, Roach said, explaining that survey responses were compiled continuously throughout the month of March.

However, a subcomponent of the index, which tracks new orders, likely presents a clearer picture of the current situation, she noted. New orders plummeted to a level of 42.2 in March, Roach said—the lowest since the depths of the Great Recession.

Meanwhile, the ISM’s services sector index fell to a level of 52.5 last month—down from 57.0 in February. Roach expects to see a much broader decline in the index in the April numbers, which will likely better reflect the impact of recent containment measures to combat the coronavirus. She also believes that the services sector will probably take an even bigger hit than the manufacturing sector, due to the near-complete shutdown of several parts of the retail, leisure and hospitality industries.

“The manufacturing side of the economy has been consistently lagging the services side of the economy the past several months, but I think the tables are going to turn pretty soon, with the services sector likely experiencing some of the most dramatic impacts,” Roach said. She added that on a global scale, similar drops in economic output are being noted in the latest surveys from Italy, France, Germany and the UK. “Unfortunately, a downward trajectory in both manufacturing and services around the word appears likely,” she concluded.

U.S. consumer confidence drops, jobless claims double

In the U.S., The Conference Board’s consumer confidence index dropped from a level of 132 in February to a reading of 120 in March. However, similar to the ISM numbers, the index likely doesn’t reflect the true extent of declining consumer sentiment, Roach said, with data only captured through March 19.

“A more accurate representation of confidence levels can be found in one of the more forward-looking parts of the survey, centered around a specific question on how U.S. consumers view the next six months,” Roach stated, explaining that this part of the index fell to a level of 88.

Going forward, consumer confidence is likely to be highly impacted by jobless claims, she said. 6.6 million Americans filed for unemployment the week of March 22-28—double the previous record of 3.3 million, set just one week earlier. With approximately 10 million Americans applying for unemployment in the past two weeks, the U.S. unemployment rate is probably now around 10%, Roach noted. This number could rise into the teens over the coming months, she added.

“There’s been such an influx of filings in the U.S. that state offices are having a hard time keeping up. Once offices are able to catch up with the demand for applications, we’ll likely see even bigger numbers,” Roach said. She also noted that the country’s nonfarm payrolls report for March—which showed 700,000 job losses—reinforced the bleak picture emerging from the labor market.

What’s behind the relatively flat performance in markets?

The first quarter wrapped up on March 31 with most global equity markets down a little over 20%, Roach said, noting that it was one of the worst quarters for markets since the Global Financial Crisis. However, despite a continued stream of challenging headlines in recent days, market performance for the week of March 30 looks to end relatively flat, she said. “As of mid-morning on April 3, Pacific time, most markets are on track to finish the week plus or minus about 2%, depending on the specific asset class and region,” Roach remarked.

This suggests that markets weren’t particularly surprised by any of the recent negative headlines, she said, noting that consensus expectations are that the economic data released during April will be challenging. “The relatively benign market performance in the face of these dismal headlines shows that markets have somewhat prepared for this—and perhaps that’s one of the more positive stories of the week,” Roach concluded.

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