Economic Update 2-04-2020

• Economic news for the week included the Federal Reserve taking no action on interest rates, and GDP gaining nominally for the last quarter of 2019. Durable goods came in better than expected, tempered results were seen in housing and consumer confidence, while manufacturing weakened in the well-watched Chicago PMI survey.
• Equities around the world lost ground during the week as uncertainties surrounding the new coronavirus put a damper on early-year positive sentiment. In keeping, high-quality bonds gained due to the reversal of flows. Commodities also suffered due to the unknown, but assumed negative economic growth impact.

U.S. stocks continued to suffer last week due almost exclusively to uncertainty surrounding the spread of the coronavirus from China, which is discussed more extensively above. By sector, energy and materials fared the worst, due to their perceived economic sensitivity to macro growth, while utilities served as the only sector with a positive return, other than consumer discretionary. A few mega-cap stocks, namely Apple and Microsoft, reported decent earnings last week, which helped buoy sentiment a bit away from the virus.

Foreign stocks fared slightly worse than domestic, due to stronger potential global trade effects from the virus. Brexit was finalized on Jan. 31, by both the U.K. and Europe, while the ‘transition’ status to create a new set of trade agreements is set to end by the end of the year. Additionally, the eurozone economy came in showing meager growth of 0.1% for Q4 and 1.0% for 2019 as a whole—continuing the recent trend.

Stock markets in China remained closed for the Lunar New Year, although no doubt these would have been affected the global panic about the virus, as evidenced by offshore markets down -5%. Other Asian markets in the geographic proximity, such as Korea, Indonesia, and Taiwan lost over -5% for the week. Commodity-sensitive nations, such as Russia and Brazil also lost similar ground.

U.S. bonds fared well with investors fleeing equity risk in all segments. Treasuries of longer duration led, as expected, although investment-grade corporates also earned positive returns. High yield and floating rate bank loans lagged, losing ground for the week. The treasury curve re-inverted, with the rates at the belly of the curve plummeted in the 5-year area, although 10-year yields also declined to just over 1.5% to end the month. Foreign developed market debt gained, along with its safe haven status, while emerging market local bonds lost well over a percent, despite a weaker dollar.

Commodities fell significantly across the board, with the exception of safe haven precious metals, along with virus fears expected to cut global economic growth. The price of crude oil dropped by over 5% to under $52/barrel, and industrial metals fared nearly as poorly due to their economic sensitivity. The lack of travel and overall demand from China, a much larger consumer of petroleum than in decades past, such as during the SARS epidemic, could exacerbate the current supply glut—keeping pressure on energy prices.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                            

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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