Weekly Market Commentary – March 9, 2020

Economic Data Watch and Market Outlook

Global financial markets continued to experience high bouts of volatility as equity indexes routinely traded up or down 2.0% to over 4.0% on a daily basis. The negative sentiment and price action caused by COVID-19 is signaling an imminent global recession/depression, and no growth in 2020 for corporate profits or revenues. Since the announcement of COVID-19 on January 17, to the market’s close on March 6, the S&P 500 has declined from 3329.62 to 2972.37 (-10.7%) with the largest sector drawdowns seen in energy (-24.8%) and financials (-15.2%). More breath taking, has been the inexorable plunge of treasury yields to historical lows. The 10-year Treasury has dropped from 1.823% to 0.767% and the 30-year Treasury from 2.283% to 1.287%. Global markets have completely ignored any positive economic data, particularly coming out of the U.S. Last week, fifteen economic data reports were released, with ten exceeding, two meeting and three were below expectations. Too bad the nonfarm payroll data of 273,000 jobs created in February (versus an estimate of 175,000) was not released in early January, equities markets would have staged a strong rally on the news.    

As we enter next week’s trading sessions, investors and strategists are wondering when will fundamentals and rational thought replace irrational emotion in driving asset prices? COVID-19, according to the World Health Organization (WHO), has infected 101,927 individuals in 93 countries and caused 3,486 deaths. Not to debase the gravity of COVID-19, in comparison the H1N1 (swine flu) pandemic in 2009 infected 60.8 million individuals causing 575,400 deaths, while the Hong Kong Flu of 1968 caused sickness in 200 million people and caused 1 million fatalities. As with all major epidemics/pandemics and disasters in the past, we are all trying to assess the potential economic drag COVID-19 will cause on the global economy. The OECD recently downgraded their global economic growth projections for 2020, from 2.9% to 2.4%, which on a dollar basis is a decline from $2.5 to $1.4 trillion. From an earnings perspective, FactSet has lowered their S&P 500 2020 Q1 earnings estimates to -0.1% from the December 31, 2019 original estimate of 4.4%. For all of 2020, FactSet still expects S&P 500 earnings to grow by 5.6% which will raise earnings from $164 in 2019 to $173. Based on a P/E of 18, the S&P 500’s implied price level is 3114 (4.8% above Friday’s close of 2972.37). Though equity markets may look attractive from a fundamental basis, we should wait till market volatility subsidies and they sustain a solid rise for a few days before increasing exposure.

In turning to next week’s economic calendar, a relatively light schedule centers around the release of U.S. inflation data. We begin on Wednesday with February’s Consumer Price Index, which is expected to be unchanged, coming in at an annual rate of 2.3%. The estimate calls for a decline of 2.1% in energy prices, while food prices are expected to increase by 0.2%. Following on Thursday is the Producer Price Index where the forecast is unchanged for February, with the annual rate remaining at 1.9%. Energy is expected to drop 1.1% for the month, and weakness is also seen in food prices, which is forecast to decline by 0.3%.

On Friday, the University of Michigan consumer sentiment index is expected to be negatively affect in the preliminary March report by COVID-19 and the sharp decline in equity prices. The Index is projected to fall by 2.5 points to 98.5.                                  

The Week In Review

U.S. Equities

U.S. equity markets were mixed as the U.S. Federal Reserve surprised investors by lowering the short-term rates by 0.5% before the scheduled March meeting, to combat the potential negative impact of COVID-19.

a) Dow Jones +1.79% MTD +1.79%, YTD -8.95 b) S&P 500 +0.65%, MTD +0.65%, YTD -7.67% c) Russell 2000 -1.81% MTD -1.81%, YTD -12.96%

Drivers: I) The FOMC cut rates by 50 bps on Tuesday, two weeks in advance of their scheduled mid-March meeting. Though markets were anticipating a Fed rate cut, the timing of the move was a surprise. Markets are also pricing in an additional four rate cuts before year end. How effective the rate cut can be in offsetting the negative economic impact of COVID-19 will be seen, as there are call for additional fiscal help on top of the emergency $8.3 billion spending bill passed by Congress to combat the virus.

II) The U.S. non-farm payroll February report came in well above expectations, as 273,000 jobs were created versus the Street estimate of 165,000. The January jobs report was also revised higher by 85,000, as a strong trend of government hiring (partly associated with the Decennial Census) has boosted recent job growth. Private sector growth was also strong, adding 228,000 in February and 205,00 on average since December.

III) The U.S. jobs data also showed average hourly earnings rose by a solid 0.3%, a 3.0% annual rate. The average work week inched higher to 34.4 hours after three consecutive months at 34.3. The February survey also showed the unemployment rate returned to a 50-year low of 3.5%. The string of positive U.S. data has the GDPNow model estimate for real GDP growth for Q1 from the Atlanta Fed to rise to 3.1% from last week’s 2.7% reading. 

IV) The ISM Services survey for February posted a strong reading of 57.3 versus a Street estimate of 54.8 and is up from the January posting of 55.5. The services sector which accounts for over 80% of the U.S. economy, has been better insulated from the recent U.S. trade wars as the majority of their sales are U.S. based. It will be interesting to see if services are hurt by the COVID-19 virus which is already affecting the travel and leisure businesses.

V) Equities Month to Date are mixed with Large-Cap, Growth, Utilities and Healthcare leading equity price performance. The laggards for the period are Small-Cap, Value, Energy and Financials.

Capitalization: Large Caps +0.45% (YTD -7.66%), Mid-Caps -0.89%(YTD -10.22%) and Small Caps -1.81% (YTD -12.96). Style: Value2.20% (YTD -16.72%) and Growth -0.28% (YTD -10.09%). Industry Groups: Utilities +7.95% (YTD +3.78%), REITs +4.78%(YTD -0.49%), Consumer Staples +6.21% (YTD -2.28%), Technology +0.56% (YTD -3.06%), Information Technology +0.42% (YTD -3.64%), Healthcare +4.94% (YTD -4.70), Communication Services -7.57% (YTD -7.07%), Consumer Discretionary -0.94% (YTD -8.58%), Industrials -1.58% (YTD -11.15%), Materials +1.39%(YTD -12.91%), Financials -3.99% (YTD -16.92%) and Energy -7.26% (YTD -29.28%).

European Equities

The MSCI Europe Index rose last week by +0.67%, as markets are expecting coordinated interest rate cuts from the global central banks and perhaps government fiscal stimulus to battle COVID-19.

Drivers: I) The Euro-zone composite PMI was up 0.3 points in January, which was in line with expectations. The index continues to show improvement, and the data would imply a 1.3% annual growth rate in Q1. But the forward look at the underlying PMI data is suggesting COVID-19 is beginning to have a negative impact. Specifically, manufacturing delivery times are increasing due to supply chain and trade flow disruptions.

II) Financial ministers and central bankers from the G-7 group held a conference call last Tuesday, to discuss possible economic policy plans to offset disruptions caused by COVID-19. Market pundits were speculating the call would highlight plans for a coordinated monetary and fiscal stimulus package. However, the group only stated they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +0.67% for the week (MTD +0.67%, YTD -10.96%).

Asian Equities

Asian equity markets were mixed, but equities in China hit a two year high as the rate of new cases of COVID-19 have declined and the government has implemented fiscal and monetary stimulus programs. The Dow Jones Asia Index declined by -0.48% for the week, (MTD -0.48% YTD -8.70%).

Drivers: I) China’s Manufacturing PMI for February plunged 14.3 points to 35.7, far below the Street consensus estimate of 45.0. This record low reading reflected the short-term impact of COVID-19, which caused widespread factoring closures and has disrupted overall economic activity. As a comparison, the second lowest reading on record for the Manufacturing PMI was 38.8 in November 2008, during the Great Financial Crisis.

II) Last week, the Bank of Japan’s Governor Kuroda issued a statement that the central bank would ensure financial market stability through appropriate market operations and asset purchases. In addition, the BOJ increased its liquidity injection into the markets through larger than normal JGB and ETF purchases. In addition, markets believe the BOJ will set up a new fund-supplying operation to secure financial institution’s long-term lending to companies that may be negatively impacted by COVID-19.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -1.86% (MTD -1.86%, YTD -12.22%), the Hang Seng Index rose by +0.38% (MTD +0.38%, YTD -7.06%) and the Shanghai Composite advanced by +5.35% (MTD +5.35, YTD -0.51%).

Fixed Income

Treasury yields saw their sharpest declines since August 2011, as the COVID-19 virus continued to disrupt economic activity as new outbreaks are being seen in U.S. cities. 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 0.767% down from 1.156%. The 30-year yield was lower last week finishing at 1.287% down from 1.678%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +1.95% last week, MTD +1.95% and YTD +5.71%. The Bloomberg Barclays US MBS TR was higher by +0.48% last week, MTD +0.48% and YTD +2.23%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.44%, MTD -0.44% and YTD -1.82%.  

Commodities

The DJ Commodity Index declined last week by -1.03% and is down month to date -1.03% (YTD -13.77%). The commodity index was lower on the week as oil and industrial metal prices continue to decline, due to fears the COVID-19 virus will cause a sharp global economic slowdown.

Performance: I) The price of oil was lower last week by -8.15% to close at $41.57 and is down month to date by -8.15% (YTD -31.92%). Oil prices experienced their worst daily decline last Friday since 2014, as talks between OPEC, Russia and allies to cut oil production collapsed.

II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was lower by -2.08 ending at 96.09 for the week (MTD -2.08%, YTD -0.31%). The price down trend of the USD continued, as traders are assessing the possibility of further convergence of US rates with the ultralow rates in Europe.

III) Gold rose last week, as the metal experienced its best weekly increase since 2011, as investors continue to favor the safe haven asset as concerns over the spread of COVID-19 persist. Gold was higher by +5.47% last week, rising to $1674.2 (MTD +5.47%, YTD +9.92%).

Hedge Funds  

Hedge fund returns in March are higher with the core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in positive territory.

Performance:

  1. The HFRX Global Hedge Fund Index is higher at +0.43% MTD and down -0.60% YTD.
  2. Equity Hedge has advanced by +0.02% MTD and lower by -4.12% YTD.
  3. Event Driven is higher MTD +0.45% and is up YTD +0.42%.
  4. Macro/CTA has risen by +1.31% MTD and is up +0.93% YTD.
  5. Relative Value Arbitrage has advanced by +0.24% and is up +0.92% YTD.
  6. Multi-Strategy is up MTD at +0.25% and is higher by +0.93% YTD.

Data Source: Haver Economics

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