Economic Data Watch and Market Outlook
Global financial markets rose last week as the “shock and awe” steps taken by the U.S. Federal Reserve and Government through unprecedented monetary and fiscal policy, ignited a relief rally. From Monday through Thursday, March 24 – 26, the S&P 500 gained 13.61%, which was the sharpest U.S. equity index rise since March 1933. As we have written over the past several weeks since the COVID-19 pandemic caused the worse decline in global assets since the 1930’s, any reversal in asset prices would require a strong monetary and fiscal policy response and a “flattening” of the curve for new COVID-19 cases. We have seen strong responses from China, Japan, South Korea and the U.S., but the Euro-zone has yet to respond with a comprehensive fiscal package. The U.S. combination of fiscal and monetary stimulus of $2 trillion (9.2% of GDP) and $4.0 trillion, has helped stabilize financial markets, at least for the short term. As to COVID-19, all eyes are on the U.S as the epicenter of new cases. According to the Johns Hopkins Coronavirus Resource Center data, the daily percentage increase and total number of new cases seem to be slowing. Local governments in New York, New Jersey and Connecticut have extended for another two weeks, containment policies that are helping to slow the spread of COVID-19.
As we enter next week’s trading sessions, we can expect global markets will continue to see bouts of market volatility. Even though we witnessed the DJIA average emerge from a bear market in a record three trading days, it is difficult to sustain a strong equity rally when the VIX is still hovering above 60. The markets would like to see evidence that the fight against COVID-19 is being won, through a decline in new cases and deaths, as well as progress towards an effective vaccine. Until this occurs, we will be bombarded by the continued guesstimates from economists and strategists as to how poorly global and regional GDP and corporate earnings growth will be for Q1 and Q2. Current estimates for annualized global GDP growth for Q1 and Q1 from JPMorgan are for the US (Q1 -10.0%, Q2 -25.0%), China (Q1 -40.0%, Q+5 7.4%), Euro-Zone (Q1 -15.0%, Q2 -22.0%), Emerging Markets (Q1 -20.6%, Q2 +17.6%) and Japan (Q1 -4.0% and Q2 -7.0%). It will be impossible to have any semi-accurate estimates for GDP growth or corporate earnings until we know when the imposed “non-essential” business and school lockdowns particularly in the U.S. and Europe are lifted.
In turning to next week’s economic calendar, we will get a sense of how the COVID-19 outbreak has affected the U.S. consumer, as we will get readings on consumer confidence, construction spending as well as the non-farm payroll report at the end of the week. On Tuesday, expectations are for the Conference Board’s consumer confidence index to fall to 115 in March from 130.7 in February. The decline is not unexpected as other sentiment indicators have recently declined, and the Conference Board’s measure is highly sensitive to changes in employment which has seen a historic rise in U.S. jobless claims due to COVID-19.
Construction Spending for February is projected to rise a solid 1.4%, following a strong increase in January of 1.8%. Contributing to the strong showing is solid residential spending as housing starts and sales have indicated a strong increase in housing demand at the beginning of the year. It is important to note, that construction activity in most regions has not be significantly hampered by the spread of the coronavirus.
U.S. nonfarm payrolls are expected to decline by 145,000 jobs in March, with the decrease in private payrolls partially offset by a small boost from Census related hiring. The decline related to Coronavirus layoffs in restaurants, leisure industry, hospitality and air travel are expected to increase greatly in April, with initial estimates calling for a decline of 2 to 4 million jobs.
The Week In Review
U.S. Equities
U.S. equity markets staged their strong weekly rise since March 1933, as the combination of strong monetary and fiscal policy measures helped to improve investor sentiment. a) Dow Jones +12.84%, MTD -14.72%, YTD -23.72 b) S&P 500 +10.28%, MTD -13.84%, YTD -20.96% c) Russell 2000 +11.68%, MTD -23.20%, YTD -31.92%
Drivers: I) Congress and President Trump passed a $2 trillion fiscal package to help support the U.S. economy and dis placed workers who lost their jobs as “non-essential” businesses have closed due to COVID-19. Direct spending amounts to about $1.2 trillion including direct payments to individuals, expanded unemployment benefits and $350 in forgivable loans to small business. Another $50 billion will go to direct loans for larger corporations and $454 billion will permit the Fed to enact the new “Main Street Lending” program.
II) Weekly jobless claims in the U.S. soared to a record 3.28 million as large parts of the U.S. economy shutdown and companies laid off workers as a consequence of the COVID-19 pandemic. The seasonally adjusted jump in initial jobless claims from March 15 to March 21 was a record, easily surpassing the previous record of a 695,000 increase in October 1982. The previous week had seen jobless claims rise to 282.000.
III) The spread of the coronavirus throughout the U.S. caused consumers to lose confidence in the economy towards the end of March. The University of Michigan consumer sentiment index fell to 89.1 in March, down from 95.9 in February. This was the poorest reading since October 2016 and will likely worsen in the coming months due to COVID-19, perhaps dropping to levels last seen during the Great Financial Crisis.
IV) Consumer spending in February rose by a modest 0.2% but is expected to drop significantly in the coming months due to a coronavirus induced recession. Income increased by 0.6% in February for the second consecutive month, and Core PCE inflation ticked up from 1.7% to 1.8%. Expectations are for inflation to drop sizably in the coming months due to recessionary pressures and the greater than 60% drop in oil prices.
V) Equities Month to Date are down with Large-Cap, Growth, Healthcare and Utilities leading equity price performance. The laggards for the period are Small-Cap, Value, Energy and Financials
Capitalization: Large Caps -14.58% (YTD -21.48%), Mid-Caps -19.72%(YTD -27.28%) and Small Caps -23.20% (YTD -31.92). Style: Value –25.48% (YTD -36.54%) and Growth -19.39% (YTD -27.31%). Industry Groups: Utilities -9.68% (YTD -13.17%), Technology -10.71% (YTD -13.92%), Consumer Staples -7.18 (YTD -14.60%), Information Technology -11.05% (YTD -14.65%). Healthcare -7.80% (YTD -16.26), REITs -14.65%(YTD -18.94%), Communication Services -16.41% (YTD -20.69%), Consumer Discretionary -14.91% (YTD -21.47%), Industrials -19.44% (YTD -27.28%), Materials -15.71%(YTD -27.60%). Financials -20.56% (YTD -31.26%) and Energy -37.03% (YTD -51.98%).
European Equities
The MSCI Europe Index was higher last week by +9.91% driven by expectations the U.S. would pass a $2 trillion fiscal stimulus package to support workers and businesses hurt by COVID-19.
Drivers: I) Euro-zone composite PMI plunged 20.1 points to 31.4 which is the greatest decline on record. This drop has pushed the PMI to below the lows seen during the Great Financial Crisis. Within the report, there was a collapse in domestic demand as new orders contracted by 21.7 points to 29.5, and new exports orders fell 11.9 points to 35.7. The employment index dropped 8.2 points to 43.2, which is consistent with a -2.5% decline in private employment.
II) The Euro-zone consumer confidence indicator dropped 5 points to -11.6, the sharpest decline since the survey began in 1985. The March decline is the worst on record exceeding those seen during the GFC. During a two-year period between 2008 and 2009, the index declined by 18.5 points, sending the survey to a historical low of -23.9. It is expected the survey will decline in April due to government containment policies.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +9.91% for the week (MTD -16.29%, YTD -25.96%).
Asian Equities
Asian equity markets rallied on expectations of the passage of the $2 trillion U.S. stimulus package. The Dow Jones Asia Index climbed higher by +8.34% for the week, (MTD -13.30%, YTD -20.46%).
Drivers: I) Japan’s Services PMI plunged 14.0 points in March, dropping to an all-time low of 32.7. This level is below the nadir of 33.7 seen in February 2009, when business activity slowed due to the GFC. Every subcomponent dropped precipitously, but new business outlook was the worst category. The new business index declined by 7.8 points to 38.6 in March, after falling by 6.3 points in February.
II) China’s industrial profit dropped 30% yoy, from January to February 2020 due to the coronavirus outbreak. The primary contributors to the decline included a sharp drop in industrial and sales revenues, as production and purchase activity were distorted by the COVID-19 extension of the Lunar New Year holiday and extended factory closings. Industrial production drop 13.5% during this period, while industrial sales revenue fell 17.7%.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +17.14% (MTD -8.29%, YTD -17.97%), the Hang Seng Index rose by +3.05 (MTD -9.61%, YTD -16.31%) and the Shanghai Composite advanced by +0.97% (MTD -3.75%, YTD -9.11%).
Fixed Income
Treasury yields declined last week as the Federal Reserve flooded the market with liquidity, including the treasury, commercial paper and mortgage backed securities sectors.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.683% down from 0.854%. The 30-year yield declined last week finishing at 1.268% up from 1.424%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +2.66% last week, MTD -1.05% and YTD +2.67%. The Bloomberg Barclays US MBS TR was higher by +1.92% last week, MTD +1.06% and YTD +2.82%. The Bloomberg Barclay’s US Corporate HY Index advanced by +4.04%, MTD -12.92% and YTD -13.97%.
Commodities
The DJ Commodity Index was higher last week by +1.38% and is down month to date -16.06% (YTD -26.75%). The commodity index was higher as precious metals saw their largest weekly price increases in over a decade.
Performance: I) The price of oil was rose last week by +21.84% to close at $21.84 and is down month to date by -51.74% (YTD -64.23%). Oil staged a technical rally last week after falling over 60.0% year to date, as traders are uncertain what will happen after the expiration of the OPEC and non-member production agreement expires on March 31, 2020.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was lower by -3.57 ending at 98.31.95 for the week (MTD +0.18%, YTD +1.99%). The USD suffered a steep decline as the U.S. Congress was in process of passing a $2 trillion stimulus package, and the Fed flooded the markets with liquidity.
III) Gold saw its strongest weekly rise in eleven years, as the precious metal rallied on the sharp declines in interest rates and USD. Gold was higher by +7.96% last week, rising to $1630.6 (MTD +2.10%, YTD +6.40%).
Hedge Funds
Hedge fund returns in March are lower with the core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in negative territory.
Performance:
- The HFRX Global Hedge Fund Index is lower at -6.26% MTD and down -7.23% YTD.
- Equity Hedge has declined by -9.61% MTD and lower by -13.36% YTD.
- Event Driven is lower MTD -5.05% and is down YTD -5.07%.
- Macro/CTA has fallen by -1.46% MTD and is down -1.83% YTD.
- Relative Value Arbitrage has dropped by -7.41% and is lower -6.79% YTD.
- Multi-Strategy is lower MTD at -7.51% and has dropped by -6.88% YTD.
Data Source: Haver Economics
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