Conway’s QuickTake: Week of March 16, 2020

Here’s what’s happening today:

Despite accommodative measures by the Federal Reserve, Stocks globally plunged Monday as investors remain concerned over the economic impact of the coronavirus and a potential recession on the horizon. Dow Jones Industrial Average futures dropped almost 5% in after-hours trading and US yields continued to plummet as investors flocked to safety assets such as treasuries. The Fed’s second emergency rate cut over the weekend was not well-received by markets; with rates at zero, the Fed has little left to do to from a policy perspective to bolster markets. In addition to the rate cut, the Fed said that it would buy $700 billion in US debt and make borrowing easier. Investors should continue to expect high levels of volatility as new information regarding the COVID-19 spread and containment measures come to light.

Here’s what happened last week:

U.S. Equities
U.S. equities ended last week with substantial losses, despite a big rally on Friday. The declines pushed major U.S. equity indices into bear market territory, representing a fall of 20% or more from recent peaks. With many markets setting new all-time highs as recently as mid-February, this was fastest onset of a bear market in history. Volatility was extreme with the CBOE Volatility Index (VIX), reached its highest levels since the 2008 financial crisis. The triggering of circuit breakers designed to halt markets under extreme volatility was also notable, as they were used twice last week (Monday and Thursday) for the first time since the late 90s. All S&P 500 sectors fell sharply, with the worst performing energy sector suffering nearly a 25% loss. Healthcare, IT and communication services were the best faring sectors, as their business models appear more resilient to current circumstances. Small-caps and value lagged large-caps and growth, respectively, as measured by the relevant Russell indices.

Source: iStock 2020

The number of COVID-19 cases continued to climb globally as the virus was officially declared a pandemic by the World Health Organization. The fastest growth in cases was outside of China in countries like Italy and the U.S. The U.S. has so far responded by limiting travel from many countries in Europe and Asia. In many cases, greater action has been taken at the state and municipal level in efforts of containing the spread and ‘flattening the curve’ of the outbreak. Legislators are simultaneously working to alleviate the economic burden from a dramatic drop in business activity and consumer spending. Last Friday, President Trump declared a national emergency and additional stimulus measures helped markets rally into the close on Friday. Most recently on Monday morning, the Federal Reserve slashed its benchmark rate to near zero.

International Equities
International stocks suffered large declines and ended the week in bear market territory according to most international indices. Developed, Non-U.S. equities were hit particularly hard with the MSCI EAFE Index losing nearly 20% in U.S. Dollar terms. Both European and Japanese equities priced in an expected halt in economic activity over the coming weeks and potentially months. Emerging market equities have generally held up a bit better possibly due to greater visibility on containment in large constituent nations including China and South Korea.

Oil prices fell last week by the largest percentage since the Gulf War after Saudi Arabia decided to dramatically ramp production and drive down prices after Russia refused to agree to production limits. This volatility added additional stress on the corporate energy market across the globe and WTI crude oil prices are now below the $30/barrel mark. The European Central Bank in conjunction with individual nations implemented fresh stimulus to help the region cope with the effects of the virus. Many European nations have also enacted travel bans and restrictions on large gatherings. Asian governments have also enacted mobility restrictions in addition to economic stimulus. In Japan, the Bank of Japan doubled its purchases of equity ETFs and appears willing and ready to step their actions up further. In China, many expect additional policy easing, although their progress on COVID-19 containment appears well ahead of other nations, despite being the origin for the virus.

Credit Markets
Credit markets generally held up better versus equities but by no means were immune to the recent market volatility. Treasuries initially performed well as yields fell sharply. Notably, the 10-year treasury yield got as low as 0.35% following the flight to safety. Since hitting these lows, yields made an unexpected comeback following unusual trading activity as investors sold Treasuries while equities and other risk assets also fell. The Fed responded by injecting $1.5 trillion of liquidity into the short-term lending market. Things continue to evolve quickly as the Fed cut rates to near 0% early Monday morning.

Credit sensitive markets generally performed much worse than treasuries. The high yield market was hit particularly hard given its exposure to the energy, industrial and retail sectors. High yield credit spreads over treasuries had one of their largest widening moves last Monday, following news of the Saudi oil price cuts and production increases. Even municipal bonds suffered losses, after a record long streak of fund inflows was reversed and thin liquidity caused volatile price moves.

Looking ahead…
Monday, March 16, 2020
•Japan – BoJ Interest Rate Decision
•US – NY Empire State Manufacturing Index
Tuesday, March 17, 2020
•US – Monthly Retail Sales, February
•US – Industrial Production, February
Wednesday, March 18, 2020
•Euro Area – Inflation Rates and Balance of Trade numbers
•US – Building Permits and Housing Starts, February
•US – FOMC Economic Projections and Fed Press Conference
Thursday, March 19, 2020
•Euro Area – Construction Output, YoY January
•China – Loan Prime Rate, 1Y
Friday, March 20, 2020
•US – Existing Home Sales, February

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

Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.
The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market.
Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market.
Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.
The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan.
MSCI EM Index captures large- and mid-cap representation across 26 Emerging Markets (EM) countries, covering approximately 85% of the free float-adjusted market capitalization in each country.
The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S.
Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.