Economic Update 3-09-2020

• Economic data last week included slower ISM manufacturing, but stronger ISM non-manufacturing/services, construction spending and a positive employment report on Friday, which surpassed expectations.
• U.S. and foreign equity markets experienced another topsy-turvy week, ending with a net gain. Investors continued to react to new cases and spread of the coronavirus. Bonds fared well, due to the ongoing flight to safety as interest rates again reached new all-time lows. Commodities were highlighted by extremely weak crude oil prices, and strength in precious metals.

U.S. stocks bounced back dramatically on Monday from the prior week’s rout, up 5% on that day alone. That initial rally was buoyed by reports of a coordinated central bank conference call designed to provide global stimulus to offset the economic damage caused by the coronavirus. On Tuesday morning, the Federal Reserve announced an unusual between-meeting rate cut of -0.50%, which matched consensus expectations. Markets turned downward, likely due to worries that global conditions that brought on the rate cut were far worse than initially feared, as the 10-year treasury rate fell below 1%—reaching new all-time lows—as the roller-coaster continued.

From a sector perspective, the defensive group of utilities, consumer staples and health care led the way with strong gains of over 5% each last week, while energy fell behind the most, down by over -5% as weaker expected demand for crude oil loomed large in investor fears.

Foreign stocks declined to a greater degree than domestic equities, despite the influence of a weaker U.S. dollar. Stimulus packages were announced from Italy and Japan, with the ECB and other European nations ready to follow as needed. While China’s stock market rebounded by 5% last week, Brazil was down by an equivalent amount due to a rising number of virus cases as well as weaker global growth and commodity price impacts, as was Russia due to the latter.

U.S. bonds have been among the best-performing assets in 2020, with investors fleeing risk, sending interest rates lower. The 10-year treasury note hit a new all-time low of 0.74% on Friday, which buoyed long duration bonds, which benefit from such dramatic shocks (although the new yield-to-maturity has plummeted on a forward-looking return basis). Accompanied with the rate cut by the Fed, the yield curve turned positive yet again. Foreign bonds fared similarly, with developed markets outperforming emerging markets, with the primary factor being a -2% decline in the value of the USD dollar.

Commodities suffered on a broader basis, as the extreme negativity in energy prices offset positive safe haven returns for precious metals; most other groups were little changed. The price of crude oil fell by nearly -8% to just over $41/barrel, as continued virus uncertainty left concerns over reduced energy demand open-ended. OPEC, particularly Saudi Arabia, discussed crude oil production cuts in an attempt to dampen price weakness, but it appeared Russia wasn’t interested in going along. Instead, it appears the Saudis are have reversed course, stubbornly deciding to let prices drop to the point where other producers are forced to capitulate. (Although low oil prices hurt the Saudis as well, their very low production costs per barrel provide them more leeway than most other nations have. This unexpected change in course is the perhaps the biggest catalyst in this morning’s sharp decline.)

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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