May 2020
A Dividend Paradox, the Fed Goes into Action, and Thematic Opportunities Appear
KEY OBSERVATIONS

What a difference a month makes—sort of… Despite continued market volatility, every market segment, except the oil-ravaged commodity sector, posted positive returns for the month of April. The peak-to-trough-to-peak performance of the S&P 500 is even more dramatic. The S&P 500 fell almost 34% from its peak on February 19 to March 23, but then rose over 30% from March 23 to the end of April. It’s a stark reminder of the perils of market timing, and an endorsement for a disciplined long-term approach focused on an appropriate asset allocation and rebalancing protocol. Unfortunately, it is also a reminder of the double-edged sword of compounding. The S&P 500 remains over 13% below its peak, and remains down for the year, along with every market segment except U.S. bonds.

The Paradox of Dividends

With the pandemic period now in the “end-of-the-beginning” phase, investors are considering how to position their portfolios for the—let’s call it—medium term. First, we’ll note what might be called the dividend paradox. Many investors are familiar with the historically important role dividends have played in the equity markets, accounting for around one-third of the S&P 500’s return over the decades. In the challenging decade of the 1970s, however, dividends contributed nearly three-quarters of the equity markets’ return. Hence, the paradox: In a challenging economic and market environment, with heightened concerns around companies cutting dividends, dividends may be even more important. There’s a lot to unpack here, so we’ve incepted a multipart series focusing on dividends, which can be found here.

Are There Thematic Opportunities?

The extremely unique and unprecedented impact of the pandemic has prompted many investors to explore thematic investing opportunities. We noted, in mathematical terms, last month that there may be increased dispersion in equity market performance going forward. Investors may simply be thinking that, with all this craziness going on, there must be some corners of the markets that will benefit. The math and the intuition are both valid.


CHART OF THE MONTH: Thematic Opportunities

Sources: Bloomberg


Here we note the recent performance of the ProShares Long Online (retail)/Short Stores Index and the FactSet Petcare Index. The global shutdown has driven retail online, and the quarantine has left many with their pet as their only companion. More thoughts on distinguishing short-term “trades” from enduring themes are in the Equity Themes section that follows.

PERFORMANCE SNAPSHOT

Only commodities were in the red for the month of April.

Returns of various common market segments

Source: Bloomberg


Equity Perspectives
Where Do We Go from Here?

It’s the question on just about every investor’s mind right now. After markets fell off the cliff beginning in late February, the bounce off the March lows—despite grim economic data—has been almost as dramatic. It feels as though there are precious few “knowns” now. As we head into earnings season, under more normal circumstances investors could use companies’ forward guidance for clues of what to expect. But since most companies have withdrawn their guidance, it can feel as though we’re flying blind.

The news isn’t all bad, however. There have been pockets of strength that have emerged, two of which we note in our Chart of the Month. The key moving forward will be differentiating what has staying power versus what may be nothing more than a dead-cat bounce.

What’s Been Working

The ubiquitous Amazon trucks delivering packages and people walking their dogs can feel at times to be the only signs of life in our neighborhoods. It shouldn’t be too surprising therefore that Internet & Catalog Retail is the best performing industry group thus far in 2020, with returns of close to 25%. But understand a key fact: The transition of retail from bricks-and-mortar to online is not as far along as many people think. Prior to the pandemic, online accounted for somewhere around 11% of total retail spending. Since we are clearly still in the early innings, this dynamic likely has a way to go. And the trend toward online will likely be accelerated as a result of COVID-19. Consider that habits formed in the quarantine may become ingrained behavior. For example, grocery had been one of online retail’s least penetrated segments, but many consumers have likely become more comfortable having groceries ordered online and delivered.

And it’s not just ourselves that we’re shopping for, it’s also our pets. For instance, Chewy.com has seen its share prices surge. The larger pet care industry (captured by the FactSet Petcare Index) includes other segments like pet care health and diagnostics that have many favorable dynamics and are significantly outperforming the broader market in 2020.

An interesting contrast can be drawn with the energy sector. Since the market bottomed in late March, energy has been the market’s best performing sector with returns of 60.18%. But is it sustainable given the lingering questions over how long the current oversupplied oil market will take to normalize? Bankruptcies of the weaker energy companies that are unable to withstand $20 oil have only begun. And beyond this, there are the structural environmental headwinds that fossil fuel providers face. Suffice it to say, the energy sector faces significant questions as to what the industry will look like in the decades ahead.

What’s Been Working

The world will likely never be quite the same after COVID-19. Beyond this, sweeping global changes in technology, demographics and consumer behavior are fundamentally transforming how we live and work. These transformative changes are broad, structural shifts—not simply passing fads. The transformation they bring will create winners and losers across the investment landscape, with impacts that won’t just be measured over the next fiscal quarter, but over the next quarter-century. Well-considered and constructed thematic strategies can help investors capitalize on these opportunities.


Fixed Income Perspectives
The Fed Proves It Is on Your Side

Following unprecedented moves in March and additional stimulus measures in April, the Federal Reserve helped to support both credit markets and the economy. Having previously launched a program to purchase investment-grade bonds, on April 9 the Fed announced expanded efforts by adding high-yield bonds, as well as high-yield bond ETFs, to the list of assets it could purchase. The new programs help companies gain access to funding they may not have received otherwise in a period where many are seeing reduced revenue streams due to the current pandemic. All in all, the Fed’s announced stimulus programs came to an astounding $2.3 trillion.

During the month, corporate bond investors rejoiced as many felt as though the Fed would do almost anything in order to help support the markets. U.S. corporate bonds rallied 5.24% and credit spreads fell 82 bps.1 Year-to-date, the broader U.S. bond market is one of the only market segments in the green—up nearly 5%, having risen 1.78% during the month of April.2 Treasury bonds, long thought of as a safe haven for investors, rose during the month as well, though just by 0.64%.

Where’d the “Income” From Fixed Income Go?

Many bond investors rely on the income streams provided by their investments, but with the 10-year Treasury near all-time lows (currently sitting at just 0.64%), that income seems to be getting smaller and smaller. In fact, the yield-to-worst on the overall U.S. bond market is at just 1.31%—a level never seen before. Yields have come under pressure more recently as money has flowed from stocks to bonds with some investors trying to de-risk their portfolios.

Looking ahead, it may be important to re-evaluate perceptions of bonds in general. Price appreciation has historically not been the primary driver for bond returns—this may not be the case moving forward. Regardless, with both the Federal Reserve Bank and the federal government seeming to take any measure they can to support the economy, we may continue to see credit spreads fall, having peaked on March 23. If that is to be the case, corporate bonds may continue to rally.

1Corporate bond performance measured by the Bloomberg Barclays US Corporate Bond Index.
2U.S. bond performance measured by the Bloomberg Barclays US Agg Index.


ProShares Investment Strategy Team



Source for data and statistics: Bloomberg, FactSet

Chewy.com represents 9.48% of the FactSet Pet Care IndexTM and 6.52% ProShares Long Online/Short Stores Index. Amazon represents 27.03% of the ProShares Long Online/Short Stores Index as of 3/31/2020. Holdings are subject to change.

The ProShares Long Online/Short Stores Index combines two specialized retail indexes. It is 100% long the ProShares Online Retail Index and 50% short the Solactive-ProShares Bricks and Mortar Retail Store Index. Solactive AG serves as index calculation agent for these indexes and performs routine daily calculations and maintenance (e.g., reconstitution, rebalancing, and corporate actions). "Solactive AG," a registered trademark of Solactive AG, and the Solactive-ProShares Bricks and Mortar Retail Store Index have been licensed for use by ProShare Advisors LLC (“ProShares”). The "FactSet Pet Care Index" and "FactSet" are trademarks of FactSet Research Systems Inc. and have been licensed for use by ProShares. ProShares have not been passed on by these entities or their affiliates as to their legality or suitability. ProShares based on the FactSet Pet Care Index are not sponsored, endorsed, sold, or promoted by FactSet Research Systems Inc., and it makes no representation regarding the advisability of investing in ProShares. FactSet Research Systems Inc. does not guarantee the accuracy and/or the completeness of the FactSet Pet Care Index or any data included therein, and FactSet Research Systems Inc. shall have no liability for any errors, omissions, or interruptions therein. THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES.

The different market segments represented in the chart use the following indexes: US Large Cap: S&P 500 TR; US Large Cap Growth: S&P 500 Growth TR; U.S. Large Cap Value: S&P 500 Value TR; U.S. Mid Cap: S&P Mid Cap TR; U.S. Small Cap: S&P U.S. 600 SC TR; International Developed Stocks: MSCI Daily TR NET EAFE; Emerging Markets Stocks: MSCI Daily TR Net Emerging Markets; Global Infrastructure: Dow Jones Brookfield Global Infrastructure Composite; Commodities: Bloomberg Commodity TR; U.S. Bonds: Bloomberg Barclays U.S. Aggregate; U.S. High Yield: Bloomberg Barclays Corporate High Yield; International Developed Bonds: Bloomberg Barclays Global Agg ex-USD; Emerging Market Bonds: DBIQ Emerging Markets USD Liquid Balanced.

THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES.

This is not intended to be investment advice.

Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. Whether or not actual results and developments will conform to ProShare Advisors LLC's expectations and predictions, however, is subject to a number of risks and uncertainties, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and other world economic and political developments. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Bonds will decrease in value as interest rates rise. International investments may also involve risks from geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and economic or political instability. In emerging markets, many risks are heightened, and lower trading volumes may occur.

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