Conway’s QuickTake: Week of March 9, 2020

Here’s what happened yesterday:

Markets were down sharply yesterday in response to the continued spread of COVID-19 globally and uncertainty around containment efforts. In addition, oil markets have sold off in response to a price war between Saudi Arabia and Russia as the countries vie for market share. Although these situations are driving heightened market volatility in the near term and may result in lower global growth, we continue to believe a diversified portfolio aligned with your risk tolerance will help weather the current environment. We advocate to remain invested for the long-term as these developments continue to unfold.

Here’s what happened last week:

Coronavirus (COVID-19) Update
As of Monday morning, more than 110,000 people globally have been infected with the coronavirus, and about 3,800 have died as the outbreak continues to spread. The virus has reached at least 108 countries, although most cases and deaths still stem from China. Within the U.S., there have been about 560 reported cases resulting in 22 deaths. Scientists, doctors, and researchers are working to learn more about the implications of the disease, understand how it spreads, and come up with a treatment or even a vaccine. The reports of new cases within China has slowed due to a strict containment effort put forth months ago, a positive development in the fight against the virus. Additionally, more than half of all people infected have since recovered back to normal health.

U.S. Equities
U.S. equities ended the week with mixed results following several consecutive days with an unprecedented amount of volatility related to the coronavirus and presidential primary elections. The S&P 500 and Wilshire 5000 rose by 0.6% and 0.4% respectively. Small-cap equities did not fare as well, with the Russell 2000 Index falling by 1.8%. Sector performance varied. The energy sector (-7.2%) fared the worst, stemming from a fall in the price of oil after OPEC failed to convince Russia, a non-OPEC member, to cut their production levels. Interest rate sensitive sectors such as utilities (8.0%) and consumer staples (6.3%) benefitted from falling interest rates. From a market-cap and style perspective, large-caps outperformed small-caps and growth outpaced valued as measured by the respective Russell indices.

Despite the market and economic uncertainty stemming from coronavirus, there were several encouraging economic data points released showing the resiliency of the economy. The Institute for Supply Management reported that manufacturing sector’s activity grew in February, albeit at a lower rate. Additionally, weekly jobless claims remained very low for the second straight week, the February jobs report indicated that more nonfarm jobs were added nationwide than expected, and the unemployment rate held firm at around 3.5% for the fifth consecutive month. In politics, Joe Biden had a strong Super Tuesday showing, which appeared to drive increased flows into high-quality sectors.

Source: iStock 2020

International Equities
The developed, international MSCI EAFE Index appreciated by 0.4% while the MSCI EM Index fared better, rising 0.7%. Europe and Japan declined on virus fears, evidenced by the MSCI Europe Index and MSCI Japan Index falling 2.2% and 2.4% in local currencies, respectively.

European economies either implemented or prepared to implement fiscal measures to deal with the virus outbreak. The worst hit European country, Italy, with ~ 4,000 cases and ~150 deaths, has passed an €8 billion stimulus package to assist in containment and treatment efforts. Similarly, Germany quickly stated they would be ready to do the same if necessary. The European Central Bank’s meeting on March 12th may result in another rate cut deeper into negative territory and may also increase the pace of its bond-buying program.

In Asia, the spread of the virus in China has been slowing while increasing in Japan. To counter this, the Bank of Japan announced they would add 500 billion yen of additional liquidity, and even purchased a record-level of ETFs on Monday to support financial markets. Separately, the Chinese purchasing managers’ index fell from 50.0 in January to 35.7 in February, hinting that the Chinese economy could very well suffer a worse-than-expected contraction in the first quarter of 2020.

Credit Markets
Falling yields acted as a tailwind to fixed income performance. The U.S. Treasury 10-year yield ended the week at an all-time-record low of roughly 0.77%. This came after an emergency 50 basis-point interest rate cut by the Federal Reserve on Tuesday, leaving the target rate between 1% and 1.25%. The Fed attributed this cut to the “evolving risks to economic activity” brought on by the coronavirus. The decline in rates led to positive returns across fixed income segments despite some widening spreads due to liquidity concerns. For reference, the broad Bloomberg Barclays U.S. Aggregate Index rose 1.9% over the week. Municipal bonds increased 0.3% as demand for municipal debt continued to be strong. Credit sensitive bonds declined due to a widening of credit spreads, despite falling rates.

Looking ahead…
Tuesday, March 10, 2020
•China – Inflation Rate, PPI, February
•France – Industrial Production, January
•Italy – Industrial Production, January
•Euro Area – Q4 GDP Growth Rate estimate, Q4 Employment Change
Wednesday, March 11, 2020
•US – Core Inflation numbers, February
•Britain – Balance of Trade, Construction Output, Industrial Production
Thursday, March 12, 2020
•Euro Area – Industrial Production (January), ECB Interest Rate Decision
Friday, March 13, 2020
•US – University of Michigan Consumer Sentiment Index
•Germany – Inflation Rate, YoY February
•France – Inflation Rate, YoY February

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

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.