Top Weekly Themes
- Does the Wuhan Coronavirus jeopardize a cyclical upturn in global growth thesis? As of today, the short answer is “no;” however, we are quite aware of our limitations when it comes to assessing the implications for financial markets, economies and humanity when unforeseen circumstances such as potential global pandemics arise. Here is what we know thus far – the number of cases of infection has risen to nearly 10,000, which exceeded the number of 2002/2003 SARS epidemic cases reported in China. However, the fatality rate for SARS in 2002/2003 was more than four times greater than the 2.2% fatality rate for the 2020 coronavirus based on available data1. Economic growth, especially in China, will likely slow and businesses with strong ties to China will be disproportionately impacted in the near term. While the worst-case case scenario could have dire consequences going forward, millions of people get the flu each year and hundreds of thousands die from it – so we need to keep some perspective. In the past when concerns arose over potential pandemics, economic growth fell then recovered sharply. We envision a similar scenario going forward and believe that prior catalysts (easy monetary policy, manufacturing recovery, etc.) are still in place to support a cyclical upturn.
- The Federal Reserve doesn’t say or do anything to shock financial markets. As expected, the Federal Open Market Committee (“FOMC”) left the federal funds target range unchanged at 1.50% – 1.75% this past Wednesday, January 29, 2020. Fed chair Jerome Powell fielded questions regarding the Fed’s balance sheet and ongoing liquidity injections from U.S. Treasury bill purchases and repo transactions. In summary, the Fed will continue to ensure that bank reserves are at necessary levels to support the economy. Our takeaway is that a Fed policy rate hike is off the table for the foreseeable future. If the news flow regarding the coronavirus takes a turn for the worst, we wouldn’t be surprised if the Fed cuts rates over the coming months.
- Economic growth for the fourth quarter of 2019 was not robust, but exceeded consensus estimates. Real gross domestic product (GDP) increased at an annual rate of 2.1% in the fourth quarter of 2019), according to the “advance” estimate compiled by the Bureau of Economic Analysis. Economic growth clearly decelerated in 2019 (2.3% year-over-year growth) and has resorted to levels seen over the course of this economic expansion. A curtailment in growth does not portend recession as evidenced by the multiple slowdowns and accelerations we’ve seen over this entire expansion. This quarterly GDP print does not offer any details that would cause us to change our market views. One positive takeaway is that the pessimistic outlook provided by the Atlanta and New York Federal Reserve Banks, which forecasted 0.3% and 0.4% fourth quarter growth in November of last year, did not come to fruition2.
1https://www.marketwatch.com/story/the-epidemic-is-a-demon-coronavirus-set-to-exceed-total-sars-infections-in-days-2020-01-29
2https://www.cnbc.com/2019/11/15/gdp-economic-growth-close-to-negative-for-q4-according-to-fed-gauges.html
Returns Table
| Equities | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
|---|---|---|---|---|---|---|
| S&P 500 | (1.5%) | 1.5% | 24.7% | 52.4% | 81.9% | 1.74% |
| Russell 1000 Value | (1.5%) | (0.5%) | 17.6% | 30.4% | 54.3% | 2.42% |
| Russell 1000 Growth | (1.4%) | 3.6% | 31.1% | 75.1% | 108.3% | 1.05% |
| Russell 2000 | (1.6%) | (0.6%) | 13.1% | 27.7% | 52.6% | 1.34% |
| MSCI EAFE | (0.9%) | 0.2% | 16.6% | 25.9% | 38.1% | 3.19%* |
| MSCI Emerging | (1.5%) | (0.3%) | 11.1% | 33.9% | 43.5% | 2.64%* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Yield |
| Bloomberg/Barc US Aggregate | 0.4% | 1.4% | 9.5% | 14.1% | 15.4% | 2.12% |
| Bloomberg/Barc US High Yield | (0.4%) | 0.1% | 10.0% | 18.7% | 33.9% | 5.43% |
| Bloomberg/Barc Muni Bond | 0.3% | 1.6% | 8.8%% | 16.1% | 18.8% | 1.49% |
| Bloomberg/Barc Global Agg. Ex U.S. | 0.1% | 0.0% | 4.6% | 13.1% | 11.5% | 0.84% |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Level |
| Crude Oil (WTI) | (3.8%) | (12.4%) | (1.4%) | 1.6% | 10.9% | 53.5 |
| Natural Gas | (0.9%) | (12.8%) | (33.1%) | (41.0%) | (29.1%) | 1.7 |
| Gold | 0.3% | 3.3% | 19.8% | 31.5% | 22.7% | 1,569.8 |
| Copper | (5.5%) | (7.2%) | (6.0%) | (2.4%) | 3.8%% | 5,715.0 |
| Currencies | Week | YTD | 1-Year | 3-Year | 5-Year | Level |
| Euro/USD | 0.41% | 2.04% | 3.86% | (2.81%) | 2.58% | 1.10 |
| USD/YEN | 0.21% | (0.43%) | 0.42% | 4.30% | 7.63% | 109.14 |
| Pound/USD | 1.06% | 2.05% | 0.68% | (3.61%) | 15.69% | 1.30 |
As of January 30, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 12/31/2019
Chart of the Week
Health Concerns and Subsequent Market Returns
| Epidemic | Month end | 6-month % change of S&P | 12-month % change of S&P |
|---|---|---|---|
| HIV/AIDS | Jun-81 | -0.2 | -10.73 |
| Pneumonic plague | Sep-94 | 8.22 | 26.31 |
| SARS | Apr-03 | 14.59 | 20.76 |
| Avian flu | Jun-06 | 11.66 | 18.36 |
| Dengue Fever | Sep-06 | 6.36 | 14.29 |
| Swine flu | Apr-09 | 18.72 | 35.96 |
| Cholera | Nov-10 | 13.95 | 5.63 |
| MERS | May-13 | 10.74 | 17.96 |
| Ebola | Mar-14 | 5.34 | 10.44 |
| Measles/Rubeola | Dec-14 | 0.2 | -0.73 |
| Zika | Jan-16 | 12.03 | 17.45 |
| Measles/Rubeola | Jun-19 | 9.82% | N/A |
Source: Dow Jones Market Data
Key Takeaways
- Fears arising from a potential global epidemic are nothing new as illustrated by the chart above. Health concerns have been persistent throughout market history.
- Global interest rates have been falling, commodity prices have weakened, and this news may cause global economic growth to temporarily slow.
- It is nearly impossible to predict the future outcome for stocks when fears arise about a potential pandemic. Returns have varied quite dramatically over the 6 and 12-month period following the onset of such outbreaks.
- Returns going forward appear to be more of a function of the economic environment during prior episodes. The coronavirus does not necessarily spell doom for financial markets and investors should not panic and make abrupt changes from an asset allocation standpoint.
- U.S. stocks are a bit stretched, so a correction was going to happen, regardless of the catalyst. Even with Friday’s selloff S&P 500 stocks were more than 7% above the 200-day moving average – current support is roughly 3000.
Commentary
The skepticism surrounding the “growth to value rotation” and outperformance of cyclical stocks has been garnering more attention. We try to be as objective as possible, follow the data, and focus less on the latest headlines. For the growth to value shift to occur, financial stocks will likely need to break out of their downtrend (see chart below). Financial stocks comprise a large weight in domestic value indices as well most international benchmarks. The decline in global interest rates, concerns over growth, and lackluster fourth quarter earnings given net interest margin (NIM) compression, have cast a weary shadow on banking stocks.
Global Financial Stocks (iShares Global Financial ETF) Returns – relative to Global Stock Market (iShares MSCI ACWI ETF): 5 Years – Ending 1/31/2020
Sources: FactSet, Inc.; Bryn Mawr Trust
Takeaway- while it’s hard to say for certain that the bottom has been reached, the underperformance of financial stocks is starting to rival what we saw over the course of 2015 and early 2016. When pessimism about the prospects for banks, which was the case in 2016, reaches a high level, returns going forward were quite favorable. Even a modest recovery is this area of the market should bode well for value indices given the large allocations to financial stocks.
