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BMT Monday Market Insights – March 2, 2020

Market Insights

Read: BMT Chief Investment Officer’s Special Market Briefing on COVID-19 (coronavirus), published February 27, 2020


 

Top Weekly Themes

  1. Coronavirus update – This past week, ongoing headlines regarding the coronavirus were widespread as the situation continues to evolve. Noteworthy updates include:  On Tuesday, the Center for Disease Control stated that they expected the virus to spread within the U.S. and that “it is not a matter of if, but a question of when.”  By mid-week it was reported that the number of coronavirus cases were not only increasing but also spreading to new geographies. According to the World Health Organization, most of the new coronavirus cases were being reported outside of China where the virus originated.  South Korea, Italy and Iran were a few of the countries where outbreaks have developed.  On Wednesday, an individual in California, who had not traveled to any of the infected regions, was diagnosed with the virus.  This provided the first evidence of community spreading of the disease in the United States.  On Thursday it was revealed that 8,400 individuals in California were being monitored after they had traveled to Asia.  With each new piece of information, investors have become more and more concerned.  The initial outbreak in China was first reported back in late December and investors are anxiously waiting for some indication that the virus has been contained.  In our view, financial markets will remain in at least some state of stress until that occurs.  But don’t forget, volatility in the present always feels worse than volatility in the past because we know the past most often didn’t result in disaster.
  2. A week of records in the equity markets – The S&P 500 Index closed Thursday down roughly 12% from its record high which was achieved only six days prior. The S&P 500 has never moved from a record high into a correction (defined as a 10% drop) in such a short period of time.  In our view, investors are allowing fear to dominate their thought process, indiscriminately selling stocks in an attempt to reduce risk amid what is a completely uncertain outcome.  We would be the first to admit that the impact to global growth, corporate earnings, and consumer confidence is unknown, but history tells us that these periods of uncertainty will eventually pass, and investor anxiety will subside.  The good news is that within the context of such dramatic market moves, stocks are usually higher when looking forward. This week we saw 2 days with 90% of NYSE issues falling. This is not normal, and when similar 2-day periods occurred in the past, the S&P 500 rallied every time over the next two months by a median of 7.6%. This in no way guarantees the same outcome today, but it does provide a guidepost amid the uncertainty.
  3. U.S. economy continues to perform – U.S. economic data reported last week was generally upbeat as new home sales reached a seven-year high while consumer confidence levels remain elevated. Mortgage rates continued to trend lower providing a boost to home buying activity as consumer confidence levels continued to benefit from a healthy labor market and modestly rising wages.  Both pieces of economic data provided some evidence that the U.S. economy remains on solid ground although the data is admittedly backward looking.  Consumer confidence levels were especially noteworthy given lackluster consumer spending that occurred in the final quarter of 2019.  During that period, personal consumption increased 1.7%, a notable slowdown compared to the prior two quarters.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 (11.7) (7.5) 8.8 33.4 56.8 1.93
Russell 1000 Value (11.3) (10.2) 1.9 13.3 32.8 2.72
Russell 1000 Growth (12.1) (4.6) 15.0 54.5 79.8 1.15
Russell 2000 (11.7) (10.1) (3.9) 10.8 30.2 1.50
MSCI EAFE (6.7) (8.1) 3.0 18.1 17.0 3.19*
MSCI Emerging (5.9) (7.4) (0.0) 19.0 19.6 2.64*
Week YTD 1-Year 3-Year 5-Year Yield 
Fixed Income
Bloomberg/Barc US Aggregate 0.8 3.0 10.8 15.1 18.4 1.84
Bloomberg/Barc US High Yield (2.0) (0.8) 6.8 16.1 29.6 5.99
Bloomberg/Barc Muni Bond 0.9 3.0 9.3 16.9 21.7 1.29
Bloomberg/Barc Global Agg. Ex U.S. 1.3 0.2 4.9 12.0 12.6 0.74
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil (WTI) ($/bbl) (12.6) (22.9) (17.3) (12.9) (5.4) 47.1
Natural Gas ($/mmbtu) (8.8) (20.0) (37.4) (34.9) (35.9) 1.8
Gold ($/ozt) 1.4 7.9 24.5 30.4 35.2 1,640.0
Copper ($/mt) (2.0) (8.7) (14.0) (5.2) (4.5) 5,618.0
1 Week Ago YTD 1-Year Ago 3-Years Ago 5-Years Ago Current Level
Currencies
Euro/USD 1.08 1.12 1.14 1.06 1.12 1.10
USD/YEN 112.09 108.68 110.90 112.11 119.55 109.99
Pound/USD 1.29 1.32 1.33 1.25 1.55 1.29

As of February 27, 2020 (close)
*Dividend Yield For MSCI EAFE and MSCI EM are from 12/31/2019

Chart of the Week

Click the chart to enlarge it.

10-Year US Treasury Yield (12-31-2015 - 2-28-2020)
Source: Bloomberg, Inc.

Key Takeaways

  • The 10-year U.S. Treasury yield dropped to a record low last week trading below the 1.364% level set in July 2016 when the United Kingdom voted to leave the European Union. The yield was roughly 1.16% mid-day on Friday.
  • U.S. Treasury securities are benefitting from flight-to-quality buying as well as increased expectations that the Federal Reserve (Fed) will lower the federal funds target range at its upcoming meeting in mid-March.
  • Interestingly, despite the record low, the 10-year U.S. Treasury yield is still trading well above the AAA rated 10-year German bund which was yielding roughly -0.61% mid-day last Friday. The low but still positive U.S. Treasury yields remain somewhat attractive to overseas investors.

Commentary

  • The Fed meets in a few weeks and will surely be discussing the ongoing developments regarding the coronavirus and its impact on U.S. and global economic growth. Investors already have high expectations for a rate cut at the March 18 meeting, as well as an additional two rate cuts by year end.  Investor chatter for an interim meeting cut has picked up as well.
  • Financial conditions have certainly been impacted over the past week given the drop-in equity markets and widening of credit spreads. Global economic growth forecasts continue to be revised lower.  A rate cut(s) can certainly be justified although its economic impact is questionable.
  • A rate cut will bring some assurance that the Fed is monitoring conditions closely but will do very little in fixing supply chain disruptions originating in China. The federal funds target range is between 1.50% – 1.75%.  Still some distance from zero but the gap keeps closing.  And, with every rate cut less ammo will be available for future use.
  • Ultimately, we believe the Fed will act, reassuring investors that they are willing to respond as necessary to keep the economic expansion intact. Although the economic benefit of a rate cut in the near-term is unclear, lower rates would continue to support areas like housing and corporate credit.

Federal Funds Target Rate – Upper Bound
(Feb. 28, 2000 – Feb. 28, 2020)

Federal Funds Target Rate – Upper Bound (February 28, 2000 – February 28, 2020)
Source: Bloomberg, Inc.

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