Week in Review

Week in Review: May 22, 2020

Beyond the Virus


The main U.S. equity indexes posted solid gains ahead of the long holiday weekend despite dipping lower later in the week, as concerns over the long-term impact of COVID-19 and worsening U.S.-China relations weighed down on investor sentiment. Nevertheless, market participants have grown increasingly optimistic in recent weeks about businesses reopening in many parts of the country, as all 50 states were reported to be engaged in some stage of business-restarting plans. However, after a robust performance early in the week, equity markets took a breather on the last two days after China surprisingly unveiled plans to impose a new security law on Hong Kong, following last year’s pro-democracy protests in the semiautonomous territory. The move drew criticism from both Republicans and Democrats, further straining fast-deteriorating ties between the world’s two largest economies and sapping investor appetite for riskier assets. In response, demand for safe havens such as U.S. Treasuries and the U.S. dollar surged as the news stirred concerns of destabilizing global markets still reeling from economic fallout of the coronavirus pandemic.

Beijing’s new legislation seeks to strengthen China’s “enforcement mechanisms for ensuring national security,” after Hong Kong was shaken by seven months of massive — and sometimes violent — pro-democracy protests. However, experts say the law will effectively circumvent the local government’s powers, undercutting the relative autonomy granted to the territory. In turn, Hong Kong’s stock market suffered its worst one-day drop in about five years after China’s move blindsided traders and prompted concerns over the Asian financial hub’s future. Earlier in the week, the U.S. Senate unanimously passed a bill aimed at ensuring that foreign companies traded in the U.S. stock exchanges are subject to the same independent audit requirements that apply to domestic companies. The bill’s fate is uncertain as it still needs to pass the House of Representatives and be signed into law, but it comes at a time when Washington appears more primed to take on the Chinese government in the wake of their perceived mishandling of the pandemic. The move, coupled with President Trump’s recent threats to impose additional tariffs, underscore surging tensions between the two nations. Despite the recent setbacks, China reiterated on Friday its pledge to implement “phase one” of its trade deal with the U.S., assuaging some concerns that it wouldn’t fulfill its trade commitments. 

Given the recent developments, Fed officials commented in prepared remarks this week that it remained very difficult to predict the future path of the economy because of the “wide range of scenarios” that could unfold depending on the success of efforts to control the virus as businesses reopen. Further, depending on the course the virus takes, and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be needed. Central bankers also noted that that they believe the economy could begin to recover and the unemployment rate could start to fall beginning in the second half of this year. Further, Richard Clarida, Vice Chairman of the Fed, said he thinks the pandemic will lead to lower inflation over the medium-term. Nevertheless, despite all the uncertainty, the Fed certainly has been clear with their message to continue to act forcefully, proactively and aggressively as they deploy their monetary policy toolkit — including the central bank’s balance sheet, forward guidance and lending facilities — to provide critical support to the U.S. economy during this challenging time. 

On the economic front, the U.S. Labor Department’s report on initial unemployment claims — a weekly focal point providing more current data on the state of the virus-stricken economy — came in at another 2.4 million for the week ended May 16. Even as the economy is beginning to reopen in parts of the country, a number of economists warn that layoffs and furloughs have caused permanent damage to the labor market. While this marked the seventh straight week of declines in the level of new jobless claims, it was still the ninth week that initial claims were in the multimillions, and brought the total since the week ended March 20 to more than 39 million. The sheer scale of the current downturn and associated job losses, and the fact that some restrictions may need to stay in place until an effective treatment or vaccine are found, highlight how a full recovery is unlikely to be swift as a number of economists had initially forecasted. On a positive note, the U.S. manufacturing Purchasing Managers’ Index (PMI) improved slightly to 39.8 in May from 36.1 in April, according to IHS Markit’s preliminary May survey. This was just a hair below economist expectations for a rise to 40.0, according to Bloomberg surveys. The services PMI also improved, and by a greater than anticipated margin. This measure rose to 36.9 in May from 26.7 in April, or above expectations for 32.5. Encouragement comes from the survey indicating that the rate of economic collapse seems to have peaked in April. 

According to some experts, in the absence of a second wave of COVID-19 infections, the decline should further moderate in coming months as measures taken to contain the coronavirus are steadily lifted. Despite the batch of negative economic reports, for much of the past month and a half, the yield on the 10-year U.S. Treasury note has hovered around two-thirds of a percentage point — a notch above its all-time low of around 0.5% previously set in March. Still, yields have barely moved, indicating that globally, there’s strong demand for high-quality debt. Taken together, the low level of the 10-year Treasury yield and its recent stability suggest that bond investors hold a less optimistic economic outlook than the equity market currently signals. However, U.S. Treasury yields that are reliably this low have wide-ranging implications for markets and the economy. For investors, paltry yields might signal a gloomy future, but they can also drive them into riskier assets in search of returns, a likely factor in the historic rebound in stocks since their decline earlier in the year.

The crisis surrounding COVID-19 eventually will pass and hopefully life gradually will return to some degree of normality. Even if it is not possible to completely eradicate the virus, society will have to learn to live with it, assuming effective treatments and vaccines become widely available. But that does not mean economic conditions will quickly return to pre-crisis levels. The path to economic recovery is likely to be rocky and it could take years to get back to pre-pandemic employment conditions. And current extreme actions will leave future monetary and fiscal policy constrained in dealing with a world of slower growth. Meanwhile, inflation could eventually become a headwind and the drift toward economic and political nationalism likely will be reinforced in the near future. More encouragingly, businesses are finding new ways to boost efficiency. Moreover, there is now an added incentive to accelerate the adoption of labor-saving and productivity-enhancing artificial intelligence technologies. 

We are all in the unfortunate position of being bystanders to an ongoing crisis. There are no compelling historical precedents to light the way forward and every government is struggling to find the right balance between reviving economic activity and preserving lives. In the face of such massive uncertainty, it makes sense to adhere to a cautious near-term investment strategy. Hopes that risk assets can be supported solely by hyper-easy monetary policies seem very complacent in our view, and it is still possible that some type of pullback, after a nearly 35% rally off the March 23 panic low, could be in the cards. Going forward, financial markets are likely to continue experiencing sharp bouts of volatility in the near term, as the coronavirus evolves and we approach the U.S. presidential election in November.


Figure 1: Manufacturing PMI (Purchasing Managers' Index)

As of 5/22/2020


Source: Thomson Reuters (5/22/2020).

Market Returns (USD)





Global Equities

MSCI All Country World

3.7% 12.0% -12.0% -0.8%

S&P 500

3.4% 14.4% -8.0% 5.0%

Dow Jones Industrial Average

3.7% 12.1% -13.4% -3.1%


3.9% 20.8% 3.9% 20.5%

Russell 2000

8.9% 17.1% -18.8% -11.5%

First Republic Founders Index

7.6% 24.8% -6.0% -

Russell 1000 Equal Weighted

6.3% 20.8% -13.9% -7.1%


4.4% 6.6% -17.7% -8.8%

MSCI Emerging Markets

3.3% 9.8% -16.1% -4.4%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

0.9% 1.7% 1.1% 3.5%

Bloomberg Barclays Intermediate Government/Credit

0.3% 1.8% 4.3% 8.4%

Bloomberg Barclays High Yield Bond

2.3% 7.0% -6.6% -1.4%

JPMorgan GBI Emerging Markets Global Diversified

3.9% 7.6% -8.8% 1.4%

Market Levels


Week Ago

Year End

Year Ago

S&P 500

2948.51 2852.5 3230.78 2856.27

Dow Jones Industrial Average

24474.12 23625.34 28538.44 25776.61

10-Year U.S. Treasury Yield (Constant Maturity)

0.68% 0.63% 1.92% 2.39%

Gold ($/oz)

$1,727.00 $1,730.30 $1,517.27 $1,273.34

Crude Oil ($/barrel)

$33.92 $27.56 $60.41 $63.10

U.S. Dollar / Euro ($/)

1.10 1.08 1.12 1.12

U.S Dollar / British Pound ($/£)

1.22 1.22 1.33 1.27

Japanese Yen / U.S. Dollar (¥/$)

107.61 107.25 108.61 110.36