Economic Update 3-30-2020
- Economic news for the week was largely focused on dramatic actions from Congress and the Federal Reserve, intended to stem damage from the coronavirus-related shutdowns that have just begun. Other released data from months prior to the virus outbreak is now largely considered ‘stale’, but included mixed results for new home sales and durable goods orders.
- Global equity markets rebounded sharply last week as extensive stimulus measures in the U.S. and Europe raised optimism about the global economy slogging through the months ahead. Bonds also fared well, especially in corporates as new government facilities improved sentiment and liquidity. Commodities were mixed with gold faring well while oil remained weak.
U.S. stock volatility continued, with eyes keyed on coronavirus infection rates (looking for a peak in cases), as well as the size/scope of a governmental fiscal and monetary stimulus package, delayed a few days, but completed by Friday. Expectations peaked on Tuesday, with a 10% market gain the largest single-day advance since 1933 (for those keeping score). It is assumed that broad portfolio rebalancing by institutions as well as short-covering (closing of bear market positions) helped boost equities higher from a technical level. Despite some pullback by Friday, results for the week were quite positive.
From a sector standpoint, all eleven gained ground, but led by utilities, which was up nearly 20%, followed by industrials and consumers stocks, up in the low double-digits. Real estate also rebounded sharply, across all sectors, including cyclical lodging/resorts.
It might be too early to call a ‘bottom’, however. Bear markets, especially those over -30%, take a while to unwind. There could be plenty of negative information to come over the next few weeks and months, as the economic picture will be ugly, and the medical situation also remains very unclear. While equity bear markets do provide attractive opportunities for total returns looking ahead a year or two in the future, it is important to be prepared for plenty of volatility in the meantime.
Foreign stocks fared well in line with U.S. equities, with results driven by stimulus measures, and virus news. Deficit rules in the EU were suspended, to allow increased government spending during the pandemic period. Japanese stocks gained nearly 20%, with news of a planned ¥56 trillion ($500 bil.) stimulus package, although infection rates there remain far lower than in other regions. This included the official postponement of the upcoming summer Olympics until 2021 (expected to negatively impact GDP growth in the near-term). Emerging markets lagged, with additional concerns over slower expected growth lasting for a longer period, low commodity prices, and possible troubles with some nations’ currency reserves (but still making payments on USD-denominated debt, and a strong dollar). There has also been a mixed reaction to increasing quarantine measures, with draconian measures in some nations, and heavier resistance to action in others.
U.S. bonds also experienced an extremely volatile week, essentially equity-like in their return pattern. The broader bond market gained 5%—consisting of treasuries up a few percent, while investment-grade corporates, high yield bonds, and floating rate bank loans all gained over 10% on the week. The fundamentals obviously hadn’t changed to that extreme a degree, but Fed intervention in corporate bond markets, and stronger confidence in liquidity helped grease the wheels for risk-taking. Spreads for both investment-grade and high yield debt have widened to levels not seen since 2008 (although falling far short of those wide levels). Foreign bonds fared positively also, with stronger returns in emerging markets due to risk being taken back on, and a -5% drop in the value of the dollar.
Recent volatility has particularly hit corporate bond ETFs, where bid/ask spreads diverged, resulting in market price discounts of up to 5% or more to underlying net asset value for a time. ETFs in these types of markets serve a few functions, but the most important of which were price discovery mechanism and liquidity ‘safety value’ for a market where most bonds don’t trade often (sometimes ever). This is important to remember in times of stress, where the mis-matches between market demands for high liquidity and lower liquidity of underlying vehicles becomes more pronounced.
From a vehicle standpoint, although these are not used in mainstream asset allocation portfolios, there were over 30 announced closures of levered/inverse ETFs last week. These have always been very tricky products, meant to provide 2x-3x exposure to a particular market or sector, but most only intended for a single day—as every night, the starting point resets. Volatility in financial markets in short periods of time can lead to much wilder behavior than many unsuspecting investors expected, with some disastrous results. Financial markets provide no free lunches.
Commodities were little changed last week on average, although individual segments diverged. Double-digit gains in precious metals, seen as a safe haven from other financial assets, were offset by further weakness in energy. The latter was demonstrated by the price of crude oil falling by -5% to around $21.50/barrel, bringing year-over-year losses in crude to a mind-boggling -65%. Despite stronger U.S. political pressure, there appears to be little progress in resolving the Russia-Saudi conflict, with an assumed intention of putting immense pressure on U.S. share producers, who need oil prices in a range of $40-60 generally, to stay profitable. Demand is also expected to plummet with the corona-related shutdowns, adding to the existing supply glut.
|Period ending 3/27/2020||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||2.66||2.67|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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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