Weekly Market Framework – Week of April 20, 2020

Critical Market Context for the Week Ahead

U.S. equities inched higher last week despite singularly dismal economic data coming in from all fronts. The S&P 500 closed just over 3% for the week on Friday, marking the biggest two-week rally since 1938. The NASDAQ and Dow Jones closed the week up 6.09% and 2.2%, respectively.

Meanwhile, the economic fundamentals struck a sharp contrast with optimism on Wall Street. Unemployment continued to spike, with the jobless claims rate reaching 22 million. The Paycheck Protection Program, an initiative that lent money to small business who would keep staff on payroll, was emptied of its entire $349 billion war chest.

Graph: National Association of Home Builders Market Index
The NAHB housing market index, which measures U.S. Homebuilder sentiment, plummeted last Wednesday from 72 to 30, the greatest one-month decline in the 30-year history of the index.
Graph: U.S. Retail Sales Monthly Change (%)
On the same day, the U.S. Department of Commerce today reported that the nation's retail sales in March contracted by 8.7%.

But while economic indicators in the labor market, manufacturing, and retail, were all deep in the red, the stock market flashed green

The market has made a historic rally as the Federal Reserve continues to inject liquidity into key, previously unabetted pockets of the market. Its expanded remit includes corporate bonds of so-called “fallen angels,” or issues that have been downgraded into “junk” bonds by ratings agencies.

Meanwhile, banks braced for loan losses, as the quarantine is putting insurmountable funding pressures on some companies. Last week Neiman Marcus missed key coupon payments on several of its loans, and now the luxury retailer is on the brink of bankruptcy. Meanwhile, other corporate borrowers are struggling to meet their obligations. Live Nation Entertainment and Marriott International asked their lenders to waive key covenants so that they could make good on the loan. Yields on bonds in the restaurant sector continue to spike.

The dominoes continue to line up. Just yesterday, oil made history, with Western Texas Intermediate pushing into negative territory, dipping below -$40 at its lows. And this week is just beginning…