Economic Data Watch and Market Outlook
The last trading week of February 2020 has ended, and we witnessed the fastest equity market price correction in history for the S&P 500. The monumental decline was triggered by the widening spread of the COVID-19 virus in South Korea, Italy and Iran. As we know, a -10.0% decline in an equity index is considered a correction and drop of greater than -20.0% is termed a bear market. The S&P 500 over the past seven plus trading sessions declined by over 12.0%. This correction was quicker than the -10.0% drop seen in February 2018 which took place over a two- week time frame. The steep market decline has wiped out any vestiges of investor complacency. The S&P 500’s forward P/E has dropped from close to 20 to 17, the VIX has risen from its long-time base of 12 to 48 (a level only reached seven time over the past decade), the S&P 500 is down 11.9% from its February 19th all-time high of 3,393, and the earnings yield (based on consensus Street earning’s growth rate of 7.0%) has soared to 5.5%.
As we enter next week’s trading sessions, when we try to apply rational thought to an irrational market, fundamental and technical indicators point to risk assets being extremely oversold and safe haven assets overbought. The unprecedented flight to quality has driven the U.S. 10-year Treasury to 1.156% and the 30-year Treasury to 1.678%, both of course all-time lows. Putting these yields into context, the 10-year and 30-year began 2020 at 1.92% and 2.391% respectively, while the current Fed Funds rate is at 1.50% to 1.75%. The direction of the financial market prices will be driven continued fear of a COVID-19 pandemic, but markets are looking to the Fed to perhaps invoke the “Powell Put” to put a floor and perhaps ignite a rally in equity prices. Fed Fund futures are pricing in a 100% probability of a 0.25% rate cut in March and is now over 80% for four rate cuts in 2020. The eventual determinate of market prices will be reassessed based on true fundamentals and economic growth post COVID-19, but until then, volatility will remain elevated.
In turning to next week’s economic calendar, the data releases of importance are the ISM Manufacturing and Non Manufacturing Surveys and the U.S. Non-farm payroll report out on Friday. We begin on Monday with the ISM Manufacturing survey where the headline composite is projected to fall 0.4 points to 50.5 in February. The reported is expected to be mixed, with the national PMI lagging improvement shown in earlier regional data. It will be interesting to see if the survey captures any negative effects from the COVID-19 virus scare.
On Tuesday, U.S. Motor Vehicle sales are expected to come in at 16.7 million units for February. This is a small decline from the January report, but is in line with Street expectations.
The ISM Non-Manufacturing survey out on Wednesday is estimated to have dropped by 0.5 points to 55.0 in February. The weakening of the survey may be attributable to concerns over COVID-19 and there is evidence of the trend already seen in the flash services PMI data released for the month.
We close out the week on Friday with the U.S. Non-Farm payroll report for February, which is forecast to increase by 175,000 jobs for the month. The unemployment rate is expected to drop back down to 3.5%, which signals continued strength in the job market. Hourly earnings are projected to rise by 0.3% in February, taking the annual rate to 3.1%.
The Week In Review
U.S. Equities
U.S. equity markets experienced its fastest market correction of -10% in history, as the spread of COVID-19 widened in Italy, South Korea and Iran. This prompted a momentous drive of capital to safe haven assets.
a) Dow Jones -12.26%, MTD -9.75%, YTD -10.55 b) S&P 500 -11.44%, MTD -8.23%, YTD -8.27% c) Russell 2000 -12.01%, MTD -8.42%, YTD -11.36%
Drivers: I) The Conference Board’s Consumer Confidence survey in February rose to 130.7, up from the January reading of 130.4. The Survey’s highest reading in six months was boosted by the outlook Americans had for the U.S. economy in 2020. The survey was taken two weeks ago before the news that COVID-19 had spread outside of China, to Italy, Iran, South Korea and 49 other countries. It will be interesting to see how if this news will be a negative in regard to how Americans view the economy and financial well-being going forward.
II) U.S. New Home Sales in January jumped by a solid 7.9% to a seasonally adjusted annual rate of 764,000. This report represented the highest rate of new home sales since July 2007. New Home Sales were higher by 18.6% on an annual basis versus reading seen in January 2019. The median sales price of a new home was $348,200 and the inventory of new homes for sale fell to 324,000, representing a 5.1-month supply.
III) Consumer Spending in January rose by a moderate 0.2% which was slightly below the Street estimate of 0.3%. Consumers spent their money on autos, food and hotels, while there was a decline in gasoline purchases due to the decline in oil prices. Consumer spending has slowed since the summer of 2019, and it may see some headwinds in the coming months if the threat of COVID-19 continues spread unabated.
IV) The core Personal Consumption Expenditures (PCE) gauge of inflation rose by only 0.1% in January, which translates to a 1.6% annual rate over the past 12 months. Inflation still remains low and is running below the Federal Reserve’s annual target rate of 2.0%. This will provide the Fed with a little runway on rates, should the spread of COVID-19 damage the U.S. economy, which could prompt the Fed to lower rates in response.
V) Equities Month to Date are all lower with Large-Cap, Growth and Communication Services leading equity price performance. The laggards on the year are Mid-Cap, Value, Energy and Financials.
Capitalization: Large Caps -8.17% (YTD -8.07%), Mid-Caps
-8.69%(YTD -9.42%) and Small Caps -8.42%(YTD -11.36).
Style: Value –10.52% (YTD -14.84%)
and Growth -8.63% (YTD -9.84%). Industry
Groups: Technology -7.26% (YTD
-3.60%), Utilities -9.83%(YTD -3.86%),
Information Technology -7.38% (YTD -4.05%), REITs -6.35%(YTD -5.03%),
Communication Services -5.63% (YTD -5.13%), Consumer Discretionary -7.67%
(YTD -7.71%), Consumer Staples -8.29% (YTD -8.00%), Healthcare -6.64% (YTD
-9.18), Industrials -9.31% (YTD -9.72%), Financials -11.17% (YTD -13.47%),
Materials -8.41%(YTD -14.11%) and Energy -14.27% (YTD
-23.74%).
European Equities
The MSCI Europe Index was lower last week by -7.70%, the largest weekly decline since the 2008 global financial crisis, as markets fretted over the potential economic fallout from the COVID-19 outbreak.
Drivers: I) The Q42019 GDP growth in Germany came in at 0.1%, in line with the first estimate. Domestic final sales were stagnant, providing only 0.2 points to growth, a fall from the 1.9-point gain seen in Q3 2019. Household and government consumption both slowed after seeing strong gains in Q3 2019 as well. Capital spending dropped 0.7% due primarily due to declines seen in machinery and equipment sales.
II) In Germany, the GDP report showed a small increase in employment growth of 0.7% for Q4 2019, but there was a decline of 0.8% in hours worked due to shorter workweeks. We believe the slowdown in economic growth has negatively impacted labor demand. Wages per employee slowed from a 3.5% yoy rate to 2.9%, which was still solid, while unit labor costs rose by 3.1% yoy.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -7.70% for the week (MTD -7.40%, YTD -10.57%).
Asian Equities
Asian equity markets were lower, with the Nikkei falling into correction territory as COVID-19 fears continued to rattle risk assets. The Dow Jones Asia Index declined by -6.60% for the week, (MTD -5.36%, YTD -8.25%).Drivers: I) Japan’s industrial production in January beat the Street expectation of flat, by rising 0.8% m/m. This was the second month in a row with a rise, after the sharp declines seen in October and November prompted by the consumption tax hike and supply-chain disruptions caused by typhoons in October. The increase in January production was led by autos and other transportation machinery, increasing 5.5% ad 16.6% respectively.
II) In China, as of February 28 according to Worldometer research, the number of confirmed cases of COVID-19 in the country was 79,257 and the total number of new cases was 433. From a positive perspective, confirmed active cases continued to trend lower, with cases outstanding at 37,121. It is estimated that approximately 39,301 patients have recovered. The total number of deaths is 2835, implying a mortality rate of 3.57%.
III) Performance of Asian Indexes for the week,
month-to-date and year-to-date. The
Nikkei was lower by -9.53%
(MTD -8.82%, YTD -10.56%), the Hang Seng Index fell by -4.39% (MTD -1.04%, YTD -7.41%)
and the Shanghai Composite was down by -5.24% (MTD -3.12%, YTD -5.57%).
Fixed Income
Treasury yields saw some of their steepest one week declines in history, as COVID-19 fears flooded investor capital into the safe haven of treasuries. The 10-year and 30-year Treasuries finished at a new record low yields of 1.156% and 1.678% respectively.
Performance: I) The 10-year Treasury yield was lower last week ending at 1.156% down from 1.474%. The 30-year yield was lower last week finishing at 1.678% down from 1.917%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +1.29% last week, MTD +1.82% and YTD +3.76%. The Bloomberg Barclays US MBS TR was higher by +0.69% last week, MTD +1.04% and YTD +1.74%. The Bloomberg Barclay’s US Corporate HY Index declined by -2.59%, MTD -1.41% and YTD -1.38%.
Commodities
The DJ Commodity Index rose last week plunged lower by -6.82% and is down month to date -5.22% (YTD -12.74%). The commodity index experienced a free fall decline last week as investors drove down industrial metal and energy prices, as COVID-19 continued outbreak engendered concerns of a global economic slowdown.
Performance: I) The price of oil was lower last week by -15.33% to close at $45.26 and is down month to date in February by -123.33% (YTD -25.87%). Oil prices plunged as the COVID-19 virus spread to several other countries, which could cause a slowdown in economic growth and demand for oil.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.21 ending at 98.13 for the week (MTD +0.79%, YTD +1.80%). The USD fell last week as the Fed stood ready to lower interest rates in the event COVID-19 negatively impacts US economic growth.
III) Gold was lower last week, suffering its largest daily decline on Friday since June 2013. The precious metal dropped approximately -5.0% on the day, as investors took profits to deleverage their portfolios that experienced severe price declines in equities. Gold was lower by -3.56% last week, falling to $1587.3 (MTD -0.38%, YTD +4.21%).
Hedge Funds
Hedge fund returns in February are mixed with the core strategies, Event Driven, Relative Value and Multi-Strategy in positive territory, while Equity Hedge and Macro are lower for the month.
Performance:
- The HFRX Global Hedge Fund Index is lower at -0.78% MTD and down -0.37% YTD.
- Equity Hedge has declined by -2.80% MTD and lower by -3.12% YTD.
- Event Driven is higher MTD +0.17% and is up YTD +0.68%.
- Macro/CTA has dropped by -0.35% MTD and is up +0.47% YTD.
- Relative Value Arbitrage has advanced by +0.09% and is up +0.78% YTD.
- Multi-Strategy is up MTD at +0.11% and is higher by +0.78% YTD.
Data Source: Haver Economics
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