Mullaney on the Markets

An April Bounce, But Will it Endure?

Two questions have emerged following the dramatic rebound in April: will containment efforts prevent a “second wave” and can stimulus allow the economy to heal itself?

By Michael Mullaney

Director of Global Markets Research 

April 2020

After falling by -12.35% during March, the stock market — as measured by the S&P 500 — surged in April, gaining +12.82% for its best monthly return since January 1987. Record monetary and fiscal stimulus, hope of an immediate medical remedy and a near-term vaccine for the coronavirus, and the re-opening of a handful of states overcame the grim economic and earnings news that were reported during the month, while the stabilization of oil prices also helped to comfort investors against a still-uncertain backdrop.

To say the price action in April was volatile would be an understatement. Out of the 21 trading days during the month, only five sessions experienced swings within 1%, either up or down. The daily price changes spanned a range from a one-day loss of -4.41% to a one-day gain of +7.03%, each move tied to news surrounding COVID-19. Since 2009, only March had more days with larger price swings than what occurred during April.

While the trend lines of cases and corresponding mortality rates began to flatten in April, the absolute statistics pertaining to the virus continued to be daunting, with 3,257,088 world-wide cases and 233,398 deaths reported at month end. On a global basis, the U.S. remained the epicenter of the disease, with 1,069,664 cases and 63,006 deaths, for a mortality rate of 5.89%. To put this into perspective, during the first 102 days of the 2009 H1N1 pandemic (swine flu) the CDC reported 43,677 infections and 302 deaths (mortality rate: 0.69%), while during the first 80 days of the COVID-19 outbreak there were nearly nine times as many infections and over 12,000 deaths (mortality rate: ~3.05%).

In sharp contrast to March, when all eleven of the sectors comprising the S&P 500 posted losses, April recorded gains in all eleven sectors. Energy, which had fallen by -34.8% in March, led all sectors with a gain of +29.78%, its best monthly return on record. Members of OPEC announced on April 12th that they, along with Mexico and Russia, had agreed to cut production by 9.7 million barrels a day in May and June, which if adhered to, would represent the deepest cut in oil production ever. Moreover, there was also evidence that travel, particularly in China, had begun to normalize.

The Consumer Discretionary sector was the second-best performer, gaining +20.55% (also a record) as cruise lines, resorts and restaurant stocks within the sector rebounded from their March shellacking with gains that ranged from 30% to nearly 50%.

The smallest gain was recorded by the Utilities sector at +3.22%, responding to the Institute of Supply Management (ISM) report that its measure of manufacturing activity fell from 49.1 to 41.5, the lowest level since April 2009.

“Risk-on” became the operative word during April as small-capitalization stocks beat large-caps, low-quality beat high-quality and high-beta beat low-beta. During April, the Russell 2000 Index gained +13.74% to the Russell 1000 Index gain of +13.31%; stocks in the S&P 1500 Index rated “B” or lower by Standard & Poor’s returned +21.98% to the +13.50% return of those stocks rated “B+” or better; and stocks with the highest 20% of beta exposure within the S&P 500 gained +18.30% to the +8.45% posted by the stocks with the lowest 20% beta exposure.

Lower quality stocks have benefitted from the Fed’s announcement that in addition to buying Treasury bonds and mortgage-backed securities, for the first time they will be buying investment-grade corporate bonds and high-yield bond exchange-traded funds (ETF’s), thus providing a liquidity backstop to lower-quality borrowers.

Given the “risk-on” environment, one would have expected Value as a style to have a strong showing versus Growth, which was indeed the case through April 10th, as the Russell 1000 Value Index, at that point, had led the Russell 1000 Growth by approximately 285 basis points. That strength in Value faded by month’s end when the notion of a “V”-shaped recovery for the economy came under question. For the month as a whole, Value ultimately lagged Growth by some 280 basis points, on average, across the small-, mid- and large-capitalization segments of the Russell indices.

The rebound in April also extended to international stocks, although the gains were less pronounced. While still generating significant positive returns, developed market international stocks (MSCI EAFE) lagged the S&P 500 during April in local currency terms (+5.51%) and in U.S. dollar terms (+6.54%). The greenback gave ground against most major foreign currencies, weighed down as a “safe haven” currency in a “risk on” environment. Emerging market stocks (MSCI EM) produced better returns than EAFE during April, gaining +8.82% in local currency terms. In dollar terms, emerging markets gained +9.18% as a basket of emerging market currencies (MSCI) gained nearly 1% versus the $USD during the month.

Looking Ahead

There is little doubt that the U.S. and a multitude of foreign economies entered a recession during Q1. When all is said and done, the magnitude of the recession may potentially rival the Great Recession of 1929 to 1932.

The carnage recorded in the U.S. labor force to date is unprecedented in modern times. Over the six-week period ending April 25th, some 30.3 million people filed for unemployment insurance, representing 18.4% of the U.S. workforce. The previous six-week record occurred in 2009, with 3.9 million claims filed, or “just” 2.8% of the workforce.

While Q1 2020 GDP fell by -4.8% on a quarter-over-quarter annualized basis (actually gaining 0.3%, year over year), the bulk of the loss versus Q4 2019 actually happened in the final three weeks of March. Consensus expectations for Q2 GDP range from a quarter-over-quarter loss of -9% to an astounding -50% decline. The range of Q4 GDP forecasts are also highly skewed, with a low-end forecast of +2.4% gain to expectations for a “V”-shaped recovery of +30% at the upper-end of the range. Earnings expectations for the S&P 500 in 2020 also have a wide range of forecasts, from a year-over-year decline of -8% down to a collective loss of -33%.

The answer to two questions will ultimately determine the future path of both the economy and the markets:

  1. Will the lockdowns, social distancing and testing that have been implemented be enough assure the containment of the coronavirus and prevent a “second wave” occurrence?
  2. Will the actions of the Federal Reserve, the U.S. Treasury and Congress prove adequate to reignite the economy or at least “buy” enough time for the economy to “heal” itself?

So far, the stock market has offered its opinion to the two questions with a resounding “yes.” The S&P has rallied by over 30% off its March 23rd low and is now just 14% below the all-time high recorded on February 19th. This implies, at least for the moment, that the market believes containment efforts are working and that the stimulus can succeed in bridging the economy to a less-uncertain environment.

If the current bear market is deemed to have ended in May, at three months it would tie the least amount of time in “bear territory,” matching the period between August ‘90 and October ’90, which also coincided with a mild recession. The average bear market during recessionary periods, however, has lasted in excess of two years.


Boston Partners Global Investors, Inc. (“Boston Partners”) is an investment adviser registered with the SEC under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. The views expressed in this commentary reflect those of the author as of the date of this commentary. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Past performance is not an indication of future results. Discussions of securities, market returns and trends are not intended to be a forecast of future events or returns.  


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