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BMT Monday Market Insights – March 23, 2020

Market Insights

Top Weekly Themes

  1. Rates go to zero. At five o’clock on Sunday, March 15, the Fed issued an FOMC statement that the Committee decided to reduce the target range for the federal funds rate to 0.0% to 0.25%. The FOMC also announced a $700 billion quantitative easing (QE) program as the central bank looks to expand its balance sheet to provide the market with liquidity. The purchases will consist of $500 billion of U.S. Treasury securities and $200 billion of agency MBS (Mortgage Backed Securities). This 1.00% rate cut follows the 0.50% emergency cut discussed in our March 9 Market Insights, as the Fed tries to ease financial credit stress. Following the aggressive reduction in the federal funds target, the Fed has announced several programs intended to stabilize credit markets including: encouraging banks to use their strong capital levels to support households and businesses; a Commercial Paper Funding Facility (CPFF) to provide liquidity in the commercial paper market; and the establishment of a Money Market Mutual Fund Liquidity Facility (MMLF) to shore up money market funds as they face rising redemption demands by investors. While the Fed can do little to curtail the spread of COVID-19, we believe that its quick actions should help keep financial markets from seizing at these heightened levels of uncertainty.
  2. Congress opens the coffers. After a few weeks of market turmoil, the U.S. government is finally getting the message that it needs to act now and in a big way to support the economy. Congress has either passed or is negotiating three phases of fiscal stimuli to support the economy as businesses temporarily close to prevent the spread of COVID-19. On March 6, President Trump signed into law Phase 1, an $8.3 billion package that includes funds to increase coronavirus test availability and expand capital for the CDC, FDA, National Institutes of Health (NIH), and the Small Business Administration (SBA). The second phase of the stimulus was signed by President Trump on Wednesday, March 18, and is expected to provide more than $100 billion worth of support. This second stimulus package includes increased funding for Medicaid and food programs such as SNAP, two weeks of paid family and sick leave, and enhanced unemployment insurance benefits. The third phase of the stimulus is still being negotiated and originates from a $1 trillion proposal from the Treasury Department. The proposal includes direct payments to taxpayers and bailouts for specific industries impacted by the global pandemic. This large fiscal policy response should help support the economy and reduce the overall impact.
  3. And then there was one. The 2020 presidential election has largely faded into the background as the coronavirus takes precedent. However, with former Vice President Joe Biden’s recent wins and a 295-delegate lead over candidate Bernie Sanders, one of the 2020 unknowns seems to be abating. While Bernie Sanders has yet to cede defeat, the pressure for him to exit the race continues to mount as his betting odds to win the nomination continue to fall following Super Tuesday primaries. Biden’s rise as the Democratic Nominee should reduce some market uncertainty surrounding the 2020 election, removing a now rather small brick in the Wall of Worry.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 (2.8) (25.1) (13.2) 7.5 27.8 2.39
Russell 1000 Value (4.8) (31.8) (23.3) (13.8) 1.6 3.60
Russell 1000 Growth (2.5) (20.4) (5.9) 27.6 50.0 1.41
Russell 2000 (5.7) (36.3) (30.9) (20.7) (9.5) 2.26
MSCI EAFE (7.3) (31.8) (25.0) (15.2) (12.2) 3.19*
MSCI Emerging (13.1) (31.1) (26.3) (13.7) (8.8) 2.64*
Week YTD 1-Year 3-Year 5-Year Yield 
Fixed Income
Bloomberg/Barc US Aggregate (3.5) (0.6) 6.2 11.7 14.0 2.31
Bloomberg/Barc US High Yield (9.7) (17.6) (11.8) (2.8) 8.8 10.75
Bloomberg/Barc Muni Bond (4.3) (5.2) 0.1 8.0 11.6 3.01
Bloomberg/Barc Global Agg. Ex U.S. (6.6) (6.1) (2.0) 5.3 8.3 1.21
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil (WTI) ($/bbl) (17.7) (57.6) (56.3) (46.9) (43.1) 25.9
Natural Gas ($/mmbtu) (10.2) (24.4) (42.4) (43.9) (41.2) 1.87
Gold ($/ozt) (7.0) (2.7) 13.3 20.2 26.5 1,478.6
Copper ($/mt) (13.0) (23.9) (27.9) (20.4) (19.7) 4,685.0
1 Week Ago YTD 1-Year Ago 3-Years Ago 5-Years Ago Current Level
Currencies
Euro/USD 1.11 1.12 1.13 1.07 1.06 1.07
USD/YEN 105.68 108.68 111.39 112.67 120.94 110.06
Pound/USD 1.25 1.32 1.323 1.24 1.47 1.17

As of March 19, 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.

Chart of the Week 2020-03-23
Source: Cornerstone Macro Research

Key Takeaways

  • While the present situation may feel dire, it may be helpful to look at the region first impacted by COVID-19, China. In the charts, you can see peak change in cases inside China, loosely align with the bottom in year-over-year change in travel within China. An important takeaway is that as virus cases began to slow, activity started to recover, a glimmer of hope that countries outside China will make it through this pandemic.
  • There are also widespread reports of things returning to normal in China. For example, Apple has reopened all mainland China stores, and there are numerous reports of workers continuing to return to work as the number of new cases in the region declines.
  • It is important to watch China for both its economic recovery and any renewed outbreak of new COVID-19 cases. The outcome in China could provide guidance for the rest of the world regarding expectations for recovery and an acceleration in cases.

Commentary

Recessions don’t happen unless people start losing their jobs. Unfortunately, we received a clue this week that a recession may be inevitable. Initial claims for unemployment insurance reported a meaningful increase this week as the U.S. economy continues to shut down to stop the spread of COVID-19. Our current expectation is for an economic rebound during the second half of 2020, following this painful shock to the system. We can look to China for what could be in store for the U.S. and other global economies who have yet to feel the impact of the virus’s spread. For example, in China, industrial production contracted 13.5% on an annual basis and retail sales dropped by 20.5%. While these declines are significant, the rebound could be quick as people return to their daily lives with monetary and fiscal policies providing support.

Unemployment Claims Chart - 2020-03-23
Sources: FactSet, Inc.; BMT

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