Conway’s QuickTake: Week of March 2, 2020

Here’s what happened last week:

The global death toll rose above 3,000 early this week as new cases outside of China continued to increase. In particular, the number of reported cases jumped in Italy, Iran and South Korea. Additional reported cases, and first deaths, within the U.S. also came out over the weekend. While cases are on the rise throughout much of the world, China is reporting increasing recoveries while slowing the number of new cases following containment efforts. Globally, the containment response is varied, although the number of travel bans is rising. We should expect that varied headlines will contribute to heightened volatility in the next several weeks as more is understood about the full effect of the virus and its economic impact.

U.S. Equities
U.S. Equities realized double-digit losses for the week as the market digested new uncertainties around the impact of the coronavirus. Almost all major domestic indices fell into correction territory from recent peaks. Losses within the S&P 500 Index were broad-based with the benchmark falling 11.4%. The energy sector (-15.4%) fared the worst, stemming from a fall in the price of oil due to reduced demand expectations. The financials sector (-13.5%) also struggled, responding to a fall in rates and subsequent expectations for compressed net interest margins (‘NIM’). The communication services sector (-9.4%) fared the best in a relative sense, supported by positive results from a few larger constituents, such as Netflix. Elsewhere in markets, large-caps exceeded small-caps and growth outpaced value, as measured by the respective Russell indices.

The strength of the current economic expansion is being tested as the potential economic impact of coronavirus is analyzed. While most expect a temporary drop in corporate profits, January personal incomes came in ahead of expectations and durable goods orders fell less than anticipated, showing some signs of optimism. Despite this, futures markets are pricing in a Fed rate cut in March with near certainty. This was supported by Fed Chair Jerome Powell’s recent statement acknowledging that the virus outbreak was “posing evolving risks,” and that the Fed would “use our tools and act as appropriate to support the economy.” Further, futures markets are pricing in more than a 50% probability of at least a full percentage rate cut by the end of the year.

Source: iStock 2020

International Equities
International Equities also logged broad losses not seen since the financial crisis. The developed, international MSCI EAFE Index declined 9.5% while the MSCI Emerging Markets Index fared a bit better, falling 7.2%. Europe was hit the hardest (MSCI Europe fell 12.0%) while the MSCI China Index fared surprisingly well, falling 4.3%.

In Europe, officials worked to contain outbreaks. The spread of the virus in Italy has already claimed nearly 20 lives and has infected hundreds more. Like in the U.S., investors are already speculating a rate cut at the next central bank meeting with near certainty. However, ECB president Christine Lagarde noted that they were carefully monitoring the situation but are not yet at the stage where the virus would have a lasting impact on inflation. Additionally, certain ECB delegates noted that fiscal policy might be required since monetary policy is already in an extremely accommodative state. In Asia, the spread of the virus in China has been slowing while Japan has been hit particularly hard. While investors don’t expect the BoJ to further cut rates, it is possible that they could address the economic slowdown by increasing asset purchases.

Credit Markets
Credit Markets responded to falling yields as the U.S. Treasury 10-year yield reached a record low of roughly 1.15%. The fall in rates contributed to positive returns across fixed income markets with limited credit sensitivity. For reference, the broad Bloomberg Barclays U.S. Aggregate Index rose 1.3% over the week. Municipals also produced strong returns benefiting from the fall in rates and as the demand for tax-advantaged paper shows no signs of letting up. More credit sensitive parts of the market, such as high-yield, fared worst as gains from declining rates were more than offset by a widening of credit spreads. This was exacerbated by significant outflows from high-yield ETFs.

Looking ahead…
Monday, March 2, 2020
•China Caixin Manufacturing PMI, February
•Italy Full Year GDP Growth, 2019
Tuesday, March 3, 2020
•Japan Consumer Confidence, February
Friday, March 6, 2020
•US Balance of Trade, January
•US Nonfarm Payrolls, February

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