Economic Update 3-16-2020

• In a very light week for economic data, producer prices fell sharply in February, while consumer prices increased slightly. Consumer sentiment also declined a bit, likely in keeping with uncertainty over coronavirus effects. However, over the weekend, the Federal Reserve cut rates by a percent again to near zero in an effort to help stem economic damage.
• Global equity markets were severely challenged, to say the least, with U.S. markets experiencing their worst one-day percentage drop since 1987, and worst overall week since the financial crisis, bringing declines into bear market territory. Bonds lost ground on net, with yields rebounding after hitting all-time lows for some maturities. Commodities also fared poorly, with continued weakness in oil prices.

U.S. stocks began the week in perhaps the worst way possible, down -7% and triggering a circuit-breaker to stem the tide of programmed trading. Growing cases of COVID-19 and the new oil price war between the Saudis and Russians created an additional layer of uncertainty under the obvious medical/economic components. This dramatic day was followed by a series of up-and-down sessions as governments and central banks discussed fiscal and monetary easing measures, including further interest rate cuts and a reported cut in the payroll tax for the remainder of the year in the U.S.

The pain began again but subsided somewhat as the Fed announced $500 bil. in short-term bank funding, as Thursdays -10% decline represented the worst percentage day since the 1987 crash—tempered a bit by a Friday recovery, following the declaration of a national state of emergency, which opens the floodgates for government support payments, such as aid to states, paid leave, expanded benefits, purchases of crude oil, etc. (In contrast to the media’s standard convention, looking at market changes in percentage terms is much more useful than point drops for the DJIA or other indexes. A single point, as an index grows with time, represents a less meaningful piece of the pie, so new point totals will likely always be a ‘record’.) Contrary to some cases, where Fed intervention was taken quite positively by markets, more recent cases appear to have raised additional concerns over the severity of the current crisis and perhaps lack of remaining ‘ammunition’.

Sector returns were a bit of a mixed story last week, as opposed to being a pure story of ‘defensive’ sectors such as utilities outperforming outright. Information technology and communications services led, with declines in the mid-single digits, while the energy sector declined by -25% on the heels of severe oil prices declines, and related uncertain near-term prospects for several firms in the group.

Foreign stocks in developed markets performed even more poorly than U.S. equities, with more implied global trade exposure and supply chain linkages to be affected by the spread of the virus. Similar central bank stimulus efforts from the Bank of England and ECB were announced, among others, promising lower interest rates and other measures to counteract economic damage from the virus. Emerging market stocks fared ‘better,’ with declines more in line with those in the U.S. Interestingly, in keeping with recent weeks, Chinese losses were more tempered than those in other regions, with virus cases apparently having peaked, and intense government efforts to help bridge the financial gap.

Fixed income experienced an unusual week, with high volatility to match that of other asset classes. U.S. treasury bonds fared well early last week, with such a poor equity market environment, but reversed to end in a loss as the yield on the 10-year fell to an all-time low of around 0.35%, before rebounding back to 0.90%. Foreign developed market bonds fared a bit better in local terms, but roughly equivalent for U.S. investors, when adjusted for a stronger dollar. Emerging market bonds experienced near or over double-digit losses in line with movements away from risk assets.

Corporate credit has seen spread widening to the largest/fastest degree in a decade, with the global business slowdown affecting the perception of downgrade and default risks. Heavily-indebted firms are the most heavily affected by a recession, so the recent central bank stimulus efforts are largely targeted to borrowers.

Commodities experienced a very negative week, in keeping with other risk assets. Interestingly, industrial metals, such as aluminum and copper, fared best, while precious metals declined as investors sought liquidity from almost all asset groups. Energy was the worst performer, led by a -33% in the price of unleaded gasoline, while the price of crude oil fell over -20% to just under $33/barrel. Early in the week, oil’s over -30% price decline proved to be the catalyst for the sharp stock market drop—a day not seen since the 1991 Gulf War era. This was the direct result of unexpected Saudi/Russian rhetoric war over oil production strategy. Rumors abound about a ‘back door’ channel of communication taking place to resolve the stand-off, but markets have not yet reacted to any signs of improvement.

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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