Conway’s QuickTake: Week of February 24, 2020


Here’s what happened last week:

U.S. Equities
Domestic equities swiftly retracted for the week as the impact of COVID-19 (Coronavirus Disease 2019) once again worried investors. Intra-week, the S&P 500 and Nasdaq reached new record-high levels but have since dropped, resulting in a weekly return of -1.2% and -1.6% respectively. Most sectors were negative while the lone positive performing sector, real estate (+0.1%), benefited from declining interest rates. On the contrary, the information technology sector fell by about 2.5% over concerns that supply chains in Asia would be disrupted. The communication services sector (-1.2%) also lagged after a steep decline in the price of ViacomCBS which is directly tied to its disappointing earnings announcement. Value outperformed growth stocks while small-caps bested larger market-caps as measured by the respective Russell benchmarks.

The most notable impact the coronavirus had thus far was felt on Tuesday as Apple stock declined. This came after the company revealed it would miss sales forecasts and is unsure of the impact on its future results. Right on the heels of Apple, the auto parts company Aptiv also declared the virus would impact its revenue and operating income figures. Somewhat alarming, the IHS Markit Flash Composite Purchasing Managers’ Index (PMI) fell into contraction territory, the first decline in U.S. private sector activity since 2013. Offsetting this negative news, there were some surprising increases in localized manufacturing levels and the latest overall home building permits reached a 13-year high according to the U.S. Housing and Urban Development and Commerce Department.

Source: iStock 2020

International Equities
International equities were mixed. In Europe, equity markets ended the week near their record highs as strong business activity reports eased COVID-19 related concerns. Separately, in Japan, the MSCI Japan Index fell by 1.4%. This decline is largely attributable to the 4Q 2019 GDP-change report, producing the worse results in more than five years. Elsewhere, Chinese markets rallied to a one-month high, supported by the central bank cutting interest rates and declining numbers of new reported cases of the coronavirus. The developed, international MSCI EAFE Index was down (-1.2%) while the MSCI Emerging Markets Index fared worse, falling by 2.0%.

Economic data was mixed largely due to coronavirus impacts. UK inflation increased dramatically to about 1.8% as a result of higher gasoline and airfare prices. In the UK jobs market, data indicates that 180,000 new jobs were created in the 4th quarter of 2019, beating economists’ expectations, and the unemployment rate remains near its record-low of 3.8%. In China, rumors circulated that factories may reopen earlier than expected to add a much-needed boost to the industrial production and manufacturing output. There was even mention of a government bailout for struggling airlines. More broadly across other emerging markets including Brazil, Russia, and Turkey, markets mostly declined due to rising political tensions, ultra-low inflation rates, and falling currency valuations versus the U.S. dollar.

Credit Markets
Debt markets had a small but positive weekly change. All domestic bond yields declined for the week, and the overall yield curve remained inverted, with the 1-year yield of 1.44%, well above the 5-year yield level of 1.32%. The longer-term, 30-year Treasury yields reached a new record low of 1.92%. Since yields and bond prices move in opposite direction, these extremely low yields resulted in a small increase in bond prices. The municipal bond market once again strengthened through the week, led by high demand levels. Likewise, investment-grade corporate bonds experienced large new issuance levels, and balanced buying and selling demands, reflected by the Bloomberg Barclays U.S. Investment Grade Corporate Bond Index rising by +0.6%.

Looking ahead…
Monday, February 24, 2020
•German Ifo Business Climate, February
Tuesday, February 25, 2020
•German GDP Growth Rate, Final, Q4 2019
Thursday, February 27, 2020
•Euro Area Business Confidence Index, February
•US Durable Goods Orders, MoM, January
•US GDP Growth Rate, 2nd estimate, Q4 2019
Friday, February 28, 2020
•GB Consumer Confidence, February
•French GDP Growth Rate, Q4 2019
•US Personal Income, January
•US Personal Spending, January

Resource of the week:
After a 40-year career on Wall Street, including heading the Investment Management Division at Goldman Sachs and serving as Chairman and CEO of AllianceBernstein, Peter Kraus decided that the active asset management industry needed a makeover. In particular, Peter believed the alignment of interests was off and there was limited trust that investment firms’ truly had the client’s best interests in mind. In this episode of Capital Allocators, Peter discusses how his new firm, Aperture Investors, seeks to fix these problems and bring a strong defense from active management against the rise of passive investing.

Sources: Trading Economics, Bloomberg, The WSJ, T. Rowe Price Global Markets Weekly Update