Financial market turbulence eased in April and the S&P 500 index increased 12.7% in the month, even as economic data weakened. Supported by a historic fiscal and monetary response, we believe equity market participants are generally looking through the weak economic data and expect conditions to improve in the second half of the year. First quarter GDP declined 4.8% and the decline in second quarter GDP is expected to be more severe, but market participants are expecting a return to growth in the third quarter. More than 33 million people have filed for unemployment since mid-March, which equates to roughly 20% of the labor force, though many of those jobs are expected to return when the economy begins to reopen. Overall, second quarter economic data is expected to be dismal. We believe additional fiscal stimulus, beyond the $2.7 trillion that has already been announced, may be necessary to foster a strong recovery.

The Federal Open Market Committee (FOMC) kept monetary policy on hold at its April 28-29 meeting, as expected, with the fed funds target rate in the range of 0%-0.25%. The FOMC expects to keep that range unchanged until they are confident the economy has weathered the pandemic and is back on track to achieving their dual mandate of maximum employment and price stability. The FOMC pledged to use “its full range of tools to support the U.S. economy in this challenging time.” The Fed continues to purchase Treasury and agency mortgage-backed securities as needed to support smooth market functioning. They have announced a range of lending programs in the last few months to help build confidence in the financial markets and support the flow of credit to households, businesses, and municipalities. The Fed indicated the pandemic will weigh heavily on the economy in the near-term and poses considerable risks to the outlook over the next year or so.

Treasury yields declined slightly in April. The yield on 2-year Treasuries declined five basis points to 0.20% (the lowest level since 2011) and the yield on 10-year Treasuries declined three basis points to 0.64%. The yield on 2-year Treasuries has declined further in May, dipping to as low as 0.105% last Friday; an all-time record low. Global economic weakness and the recent collapse in oil prices has put downward pressures on inflation expectations. An ongoing global demand for safe-haven dollar-denominated assets has also kept a lid on Treasury rates. The Treasury yield curve suggests that the Fed is likely to keep its main policy rate near the zero bound for an extended period.