For the week ending Friday, March 6, 2020, the equity markets were extremely volatile and yet ended the week +0.5%. The market digested a surprise rate cut from the US Federal Reserve, increasing cases of COVID-19 globally, unexpected Super Tuesday primary results in the US, a decline in the 10-year and 30-year US Treasury bonds to historically low levels, and an $8 billion fiscal stimulus package in the US.
On Tuesday, the US Federal Reserve cut the target rate by 0.50%, the largest rate cut since the Global Financial Crisis. This move has been dubbed an insurance cut to help loosen financial conditions in the US with lower interest rates. The rate cut was not well received by the marketplace as it highlighted the increasing concern about the impact that COVID-19 will have on the economy through supply chain disruptions, decreased travel and tourism, and social distancing weighing on consumers’ livelihoods. The Fed also left the door open for further rate cuts. While the Fed’s actions may have a limited effect on potential supply and demand disruptions, the stimulus did loosen financial conditions for companies and consumers, which may provide some modest support.
In addition to the monetary policy delivered by the Federal Reserve, the House and Senate approved an $8.3 billion fiscal aid package. The largest portion of the stimulus, $3.1 billion, will flow to the US Office of the Secretary of Health and Human Services, with a commitment to be available until 2024. Allocations also have been made to international aid efforts ($1.25 billion) state and local health departments ($1.00 billion), and vaccine efforts and other treatments ($300 million). The bill strives to keep vaccines affordable for all citizens in part by allowing the Secretary of Health and Human Services to regulate the commercial price of vaccines. The bill also contained $1 billion in subsidies to provide $7 billion worth of low-interest loans to small businesses. It was refreshing to see partisanship cast aside to address such a grave public health concern, particularly in conjunction with the 50bp rate cut by the Fed.
During the tail end of the week, COVID-19 related updates took the spotlight as growing contagion and fatalities illuminated the scale to which the crisis could impact global economic activity and, in turn, corporate earnings. As of March 6, analysts expect US earnings to contract (0.1%) in 1Q before rebounding the rest of the year (Source: Factset); however, in our judgment, it remains too early to make meaningful projections of economic or market impact.
In response to heightened uncertainty, bond yields around the globe have tumbled, in some places, to record lows. The US 10-year yield ended the week at 0.74%, meaning that investors who loan the US government funds will earn about ¾ of a percent per year for the next decade. While unfolding events can be frightening for even long-term investors, selling stocks or other risk assets to buy into such low yields suppresses the long-term return potential of the portfolio.
COVID-19 wasn’t the only event driving uncertainty last week; market investors are also closely watching the US election. Wednesday saw a strong bounce in US and global equity markets in response to Joe Biden’s surprisingly positive performance in Super Tuesday primaries. Markets generally favor Biden over Bernie Sanders, whose policies are seen by many as unfriendly to corporate profitability. Markets were encouraged by Joe Biden’s rising competitiveness as his more moderate views—including opposing Medicare for All and increasing taxes but not in excess of 2017 levels—would be less disruptive to the current system than the alternatives proposed by Sanders. We continue to see election outcome uncertainty driving market volatility, at least through the election.
One would expect China, the epicenter of the global COVID-19 outbreak, to be suffering alongside other global equity markets, especially given headline news of mass quarantines and large-scale manufacturing reductions. To the contrary, Chinese equities have performed relatively well as evidenced by the MSCI China Index return of (1.90%) year-to-date through 3/6/2020 vs. (7.67%) of the S&P 500 Index and (10.08%) of the MSCI ACWI ex USA Index. There are myriad reasons China’s equity market may have been more resilient so far. Based on Chinese government data, the number of new cases in China has been moderating while reported new cases are on the upswing outside of China. As well, the Chinese government has been clear about its willingness to continue monetary and fiscal stimulus in the face of uncertainty. Still, a lack of confidence in the accuracy of Chinese government data makes it difficult to assess the true scope of COVID-19’s path.
The Week Ahead
Ongoing COVID-19 developments will undoubtedly drive headlines during the week ahead, and in turn, market performance; however, as our near-term sentiment and long-term assumptions are driven by economic data, we remain focused on processing any relevant economic data or policy decisions as they are released. To that end, the following is a list of what we will be watching this week. We look forward to sharing our recap with you next week.
- Sunday (3/8)
- Japan GDP Final Q4
- Monday (3/9)
- Germany Balance of Trade
- Japan Balance of Trade
- Tuesday (3/10)
- China Inflation, PPI Release
- EuroZone GDP Q4 Final
- Wednesday (3/11)
- US CPI & Core CPI
- UK Balance of Trade
- Thursday (3/12)
- US PPI, Weekly Jobless Claims
- ECB Interest Rate Decision (& Press Conference)
- Friday (3/13)
- US Consumer Sentiment Index Release
- UK BOE Financial Policy Committee Meeting (Interest Rate Decision)
- Sunday (3/15)
- China Industrial Production, Balance of Trade, Retail Sales Release