Economic Update 3-02-2020

• While overshadowed by volatile financial markets last week, economic data included strong housing results and prices, decent increases in consumer confidence, as well as durable goods orders that declined less than expected.
• Equities in both U.S. and foreign markets experienced their worst week since the financial crisis, driven lower by uncertainty about the economic impact of the coronavirus outbreak. Bonds fared well, though, coupled with treasury interest rates reaching new lows for the cycle. Commodities also suffered due to dampened prices for crude oil—affected by perceived lower demand.

In short, equities experienced their worst performance week since the financial crisis over a decade ago. U.S. stocks started off poorly, down nearly -3% on consecutive days Monday and Tuesday—representing one of the -10% corrections on record. This week’s volatility was especially aggravated by the low volatility environment we’ve become used to over the past few years. Every sector fared negatively, with energy slightly worse than average, due to plummeting oil prices, and staples and healthcare slightly better, due to their defensive characteristics. Real estate fared just as poorly, in keeping with fears of a possible recession.

The deteriorating sentiment coincided with coronavirus infections spreading beyond China, to South Korea and Italy, and mid-week, reports of cases in California. Naturally, this raised concerns over a spreading pandemic and its associated negative human and economic impact, as discussed above. There are other factors, though, such as the success of presidential candidate Bernie Sanders in primaries/polls that increase his chances of the Democratic nomination—especially with Super Tuesday upon us (a day where a third of overall party convention delegates are chosen in 14 states). Certainly, a candidate with self-described socialist tendencies is concerning to financial markets and business executives, let alone specific sectors such as pharmaceuticals under a ‘Medicare for All’ plan.

Foreign stocks in both developed and emerging markets also experienced losses, however, not as severe as in U.S. markets. Interestingly, declines in Japan and emerging markets were not as severe as those in Europe and the U.K. Commodity-sensitive markets such as Brazil, Mexico, and Russia were among the worst-performers. Chinese markets fared surprisingly well, with tempered losses, due to reports of new virus cases declining, some affected areas reopening, and aggressive government stimulus to help stop the damage.

U.S. bonds offered positive returns, as expected, given the extreme flows away from equities. Amazingly, we reached a new all-time modern low in yield for the 10-year treasury at just above 1.1%, while the middle of the curve dipped below 1%. As is common with crisis events, long treasuries fared best—last week gaining nearly 5%. High yield and floating rate debt each posted losses. Foreign developed debt performed positively, aided by a -1% drop in the dollar, while emerging market bonds fared poorly along with other higher-risk assets. Last week in fixed income is important to remember next time investors read yield forecasts, that particular low levels are an anomaly and unlikely to occur again. We’ve heard this many times over the past decade(s), and reiterates the need for core fixed income in a portfolio—no matter where rates currently stand.

Commodities performed poorly across the board, with fears of slower economic activity putting a damper on demand, with the energy sector ending the week as the worst performing and precious metals also losing ground, surprisingly. The price of crude oil fell sharply, by over -15% on the week to under $45/barrel. As in prior weeks, this was related to higher recession risks posing continued threats to demand.

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. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT