Stock markets around the world continued to face off against COVID-19 throughout April as both equities and infection rates underwent near-relentless expansions. The official infection rate more than tripled during the month to over three-million cases worldwide—and is assumed to be a dramatic undercount given the lack of available testing. Coronavirus lockdowns were therefore maintained around much of the world. Nevertheless, shares advanced globally almost without exception during the month as forward-looking investors spotted sources of encouragement—including plans to slowly reopen economic activity in some regions; developments in the race for COVID-19 treatments and vaccinations; and much lower securities pricing after the selloff in February and March.

US shares outperformed other major developed markets in April as the S&P 500 Index generated its highest one-month return since 1987 and volatility was nearly halved (according to the CBOE Volatility Index, or VIX Index). While the UK, along with most European countries, Japan, and emerging-market giant China lagged the US, each finished high above their respective average one-month returns (according to country-level components of the MSCI ACWI Index).

US and UK government-bond rates fell across all maturities during the month. In the eurozone, long-term rates fell as shorter- and intermediate-term rates increased somewhat. The West-Texas Intermediate (WTI) oil price plummeted below zero US dollars per barrel for the first time in history—briefly touching -$40 per barrel in April as its contract for May delivery neared expiration; the June contract traded between $10 and $20 per barrel through the end of April. Despite a 23-nation agreement led by the US, Saudi Arabia and Russia to cut production by 10 million barrels per day, oil inventories were projected to reach full storage capacity at some point in 2020.

The UK government continued to build out its Coronavirus Job Retention Scheme during April, extending the programme by another month until the end of June. It also increased the ceiling on a loan-guarantee programme, enabling companies with annual revenues above £45 million to access support if they’ve been impacted by the lockdown period (which was extended by another three weeks). Prime Minister Boris Johnson emerged from his personal battle with COVID-19 in April, having been hospitalised in intensive care and temporarily deputising Foreign Secretary Dominic Raab to fulfil his role while incapacitated.

In the US, the $349 billion in stimulus funds allotted for small businesses through the Paycheck Protection Program (PPP) in late March was depleted in a matter of weeks—requiring Congress to authorise an additional $321 billion in funding by mid-April to keep the programme in place. Larger companies, some publicly traded, received loans from the programme, prompting public criticism and demands from US Treasury Secretary Steven Mnuchin that those companies apologise and return the loans (which some did); he also said that loans extended under the programme for above $2 million will be subjected to an audit. The US Department of Justice also announced it would investigate instances of fraud associated with the PPP. This follow-up appropriation drove the US annual deficit to $3.7 trillion, blowing through the previous record of $1.5 trillion set in 20101.

President Donald Trump issued an executive order in April to suspend immigration for 90 days, denying work visas for most types of jobs. He also invoked the Defense Production Act of 1950 in an effort to force meat-processing plants to remain open, despite labour unions’ concerns about the danger of working in close quarters during the pandemic. The state-to-state outbreak response continued to vary widely, with some states (like New York) extending lockdowns into May while others (like Georgia) started to allow non-essential businesses to open in late April.

Elsewhere, Germany began reopening on 20 April, with plans for a phased return to schools starting in May, and clear benchmarks for returning to lockdown in the event of resurgent spread of COVID-19. New Zealand declared that it eliminated widespread community transmission of COVID-19 as at 27 April, enabling citizens to start moving more freely and non-essential businesses to begin reopening.

The International Monetary Fund (IMF) forecasted the worst recession since the Great Depression as a result of COVID-19 containment measures, and announced that half of all member countries have requested a bailout from the lender of last resort. Argentina skipped a $503 billion debt payment due in late April, starting a 30-day clock toward default, shortly after a group of international creditors rejected the government’s latest plan for restructuring its sovereign debt.

Economic Data

Manufacturing activity collapsed during April across the UK, eurozone and US after contracting at a relatively mild pace in March. Their respective services sectors were hit much harder than manufacturing in March as lockdowns took effect, and were not spared by that fact as conditions continued to tighten sharply in April. Preliminary data indicate that services activity contracted more sharply in the UK and eurozone than in the US during April.

• Retail sales plummeted 5.1% in the UK during March and 5.8% yearover year.
   
• Overall eurozone economic activity contracted by 3.8% during the first quarter—the worst decline since the EU began keeping records for euro area gross domestic product (GDP) in 19952.
   
• US jobless claims climbed to approximately 30 million from mid-March through the end of April, representing that roughly 20% of the US labour force has applied for unemployment insurance. Overall economic activity contracted by an annualised 4.8% rate during the first quarter for the lowest reading since the fourth quarter of 2008.

 
Central Banks

• The Bank of England’s (BoE) Monetary Policy Committee did not meet during April. BoE Governor Andrew Bailey sought to reaffirm the central bank’s commitment to avoiding monetary financing (that is, purchasing government debt to fund deficits) by assuring that any expansion in the government’s overdraft would be repaid by the end of 2020.
   
• The European Central Bank (ECB) lowered the rate on its targeted long-term refinancing operation (TLTRO III) further into negative territory following its end-of-April meeting, effectively paying banks to lend. The ECB also announced a new programme called the pandemic emergency longer-term refinancing operations (PELTROs) to help facilitate proper functioning of money markets.
   
• The US Federal Open Market Committee met in late April and announced no new changes. In a post-meeting press conference, Federal Reserve (Fed) Chair Jerome Powell pressed lawmakers “to use the great fiscal power of the United States to do what we can to support the economy.”
   
• The Bank of Japan committed to open-ended purchases of Japanese government bonds in an effort to keep yields low and stable following its late-April monetary-policy meeting. It also announced a ramp-up to its purchases of corporate bonds and commercial paper, with a target of ¥20 trillion.
   
• The People’s Bank of China decreased the rate on its one-year medium-term lending facility to the lowest level since the rate’s inception more than five years ago. The central bank also cut its benchmark loan prime rate (one- and five-year rates). Additionally, a cut to bank reserve requirements came into effect in mid-April, freeing bank capital reserves for lending.

SEI’s View

Black swans, once largely presumed a myth because only the white variety was ever observed in nature, have become symbols of events that are exceptionally rare in occurrence and severe in impact. Today we are confronted with a black swan in the form of a pandemic, as COVID-19 continues its rapid spread and causes financial markets to plunge across much of the world.

The sudden and widespread stop in economic activity by government fiat is something that has never before been experienced on such a scale. The ultimate impact on GDP is truly anybody’s guess. The first quarter of 2020 saw an annualised decline of 4.8% in the US. The second quarter will likely be one for the record books; Wall Street economists forecasted a quarter-to-quarter annualised decline ranging from 12% to 30% as of late March.

National governments have been quick to respond. All central banks are in crisis-fighting mode, having learned valuable lessons during the 2008-to-2009 great financial crisis, re-establishing unconventional bond-buying programmes and creating some new facilities to expand the types of accepted collateral in order to extend cash to companies that need it.

The Fed and other leading central banks have moved with an alacrity and forcefulness that we find commendable. But central banks cannot single-handedly support this economic shutdown. In our view, fiscal policy—in the form of direct income support, tax deferrals, loan guarantees and outright bailouts of industries badly damaged by the halt of economic activity—must be the prime tool used to conduct the response to this crisis.

The fiscal response is occurring with a speed and decisiveness that has seldom been seen. The US Congress passed into law a fiscal response that should easily top 10% of GDP—meaning that the overall deficit this year in the US could approach 15% of GDP.

Other developed countries are looking to pursue a similar strategy of massive income support and liquidity injections. Germany, a country that typically keeps its wallet closed, is setting the example for Europe. The government proposed a package equivalent to a whopping 30% of the country’s GDP, counting contingencies. Since Germany has built up large reserves in its existing income-support programme, the supplementary budget is expected to push its on-budget deficit only toward 5% of GDP in 2020 following several years of surplus.

Few other countries in Europe have the fiscal strength of Germany. Italy, the European epicentre of the virus, will be particularly hard-pressed to do all that is necessary to stabilise its economy. Italy’s government debt-to-GDP ratio is already well above that of other major European countries.

In our view, a financial crisis can be averted in Europe if the ECB backs up the debt. This is now-or-never time for the EU and eurozone. The stronger countries must come to the aid of the weaker, or else face an intensified popular backlash that could threaten the unity of the economic zone. Unfortunately, Germany and the Netherlands have not yet answered this call to rescue, and are standing in the way of the EU issuing “corona bonds.” We anticipate this opposition will ultimately melt as the disaster continues to unfold.

The onslaught of developments presented by the spread of COVID-19 and a simultaneous collapse in oil prices has forced financial markets to recalibrate prices sharply as expectations about different industries and the overall economy shift at a breakneck pace. Investors should gain some reassurance, however, from the fact that a virus-containment-induced earnings recession is generally only expected to last a couple quarters or so. If market prices are based on a long-term, multi-year expectation, then this fallout should represent a relatively small part of the market’s forward-looking focus.

We are grateful that the chaotic trading in March has eased considerably, thanks to liquidity provided by central banks and fiscal packages offered by governments around the world.

Only time will tell whether markets have sufficiently discounted the pain that lies immediately ahead. We have to be cognisant of the fact that earnings estimates will be coming down hard—maybe by 40% to 50% on a year-over-year basis—over the next two quarters. These waterfall declines in earnings could drag equities down with them, but likely not to the same extent. It all depends on how willing investors are to look beyond the valley. If there is a belief that the fiscal and monetary measures taken in the past two weeks will successfully prop up the global economy, then markets should prove resilient. We think a great deal of volatility is still ahead of us, but perhaps not to the extent of the February-to-March experience. Indeed, if there are signs that the infection rate is beginning to peak in Europe and the US, it may not matter at all where earnings go in the near term. Investors will likely bid stock prices higher in anticipation of an economic recovery, as they almost always do.

During periods of chaos in financial markets, investors often picture professional portfolio managers frantically trading in an effort to avoid the worst of the carnage while seeking opportunities to profit. At SEI, that reality couldn’t be further from the truth.

With a pandemic crippling the global economy and an oil glut exacerbated by suspended activity around the globe, we find ourselves in an environment almost completely void of reliable information—which, to us, makes frantic trading an especially unwise approach to financial stewardship. So, what are we doing?

We stick to our investment philosophy and process, maintaining our view that diversification is a sound approach over full market cycles, which include bull markets (some of which last for more than a decade) and bear markets (which can vary in terms of length and severity).

Right now, as always, we are exploring how to deliver as diversified a portfolio as possible to all of our investors regardless of their risk tolerance. We’re considering the known risks inherent to the capital markets as well as the uncertainty that comes with any long-term investing plan, such as the black swan we’ve encountered in 2020.

We build and maintain long-term-oriented portfolios by being attuned to the evolving correlations, or relationships, between asset classes. We believe our strategies are robust and built to handle the kinds of challenges presented in today’s environment.

With this in mind, what should you do?

For one thing, we think checking your portfolio’s balance every day is about as helpful as watching the news these days. It won’t do anything to ease your nerves. At a portfolio level, we encourage investors to stay diversified and avoid short-term trading in these volatile markets.

If you are a goals-based investor—and your portfolio is aligned with your goals, time horizon and risk tolerance—be patient. Time should be on your side.

You’re seeing a real-life, albeit metaphorical, black swan. Use this experience to become a better, more informed investor. We will continue to monitor economic and financial-market developments and provide our insight to help you achieve that goal.

Glossary of Financial Terms

Bear market: A bear market refers to a market environment in which prices are generally falling (or are expected to do so) and investor confidence is low.

Bull market: A bull market refers to a market environment in which prices are generally rising (or are expected to do so) and investor confidence is high.

Federal-funds rate: The federal-funds rate is the interest rate at which a depository institution lends immediately-available funds (balances at the US Federal Reserve) to another depository institution overnight in the US.

Fiscal policy: Fiscal policy relates to decisions about government revenues and outlays, like taxation and economic stimulus.

Paycheck Protection Program: The Paycheck Protection Program is a loan offer by the U.S. government’s Small Business Administration (SBA) designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

Repo funding: Repo (also known as a repurchase agreement) refers to a type of short-term borrowing for dealers in government securities. Central banks can increase the cash available to commercial banks by repurchasing the government securities that they own.

Index Descriptions

CBOE Volatility Index (VIX Index): The VIX Index tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.

MSCI ACWI Index: The MSCI ACWI Index is a market-capitalisation-weighted index composed of over 2,000 companies, and is representative of the market structure of 46 developed- and emerging-market countries in North and South America, Europe, Africa and the Pacific Rim. The Index is calculated with net dividends reinvested in US dollars.

S&P 500 Index: The S&P 500 Index is an unmanaged market-capitalisation-weighted index comprising 500 of the largest publicly-traded US companies and is considered representative of the broad US stock market.

Important Information

Data refers to past performance. Past performance is not a reliable indicator of future results.

Investments in SEI Funds are generally medium- to long-term investments. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. Narrowly focused investments and smaller companies typically exhibit higher volatility. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.

While considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR which is authorised and regulated by the Financial Conduct Authority. Please refer to our latest Full Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Key Investor Information Documents and latest Annual or Semi-Annual Reports for more information on our funds. This information can be obtained by contacting your Financial Adviser or using the contact details shown above.

SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.

The opinions and views in this commentary are of SEI only and should not be construed as investment advice.