BY: FRANK HOSSE
Director of Investments – Argent Trust Company | 615.385.2720
Fears and concerns about the spread of the coronavirus outside of China and its potential economic impact drove stock markets lower in February. U.S. stocks fell around 8%, while developed international stocks fell a similar amount and emerging-market stocks dropped 5.3% for the month.
The final week of the month was particularly rough for U.S. stocks—falling every day of the week and logging an 11.5% total loss. This was the worst weekly loss for the S&P 500 since October 2008 and the sixth-worst week since the 1930s. It’s fair to say volatility has returned to the markets.
It remains difficult to handicap what the economic impact of the coronavirus will be. But it remains a widely held assumption that the virus will not have a long-term effect on economic growth, although most economists are cutting near-term GDP growth estimates. For example, the OECD recently cut their 2020 global GDP growth estimate to 2.4% from 3% last November. They revised China’s GDP growth sharply to below 5% this year, down from 6.1% last year. They wrote that “broader contagion across the wider Asia-Pacific region and advanced economies—as has happened in China—could cut global growth to as low as 1.5% this year, halving the OECD’s previous 2020 projection from last November.” The risk of a recession has increased in the near term for some countries. For example, Japan will likely be in a recession when their next GDP number is released. Though, in recent days central bankers around the world have said they are ready to act if the economic impact deems it necessary.
Fixed-income markets rallied on the virus fears, as well as an increasing belief that the Federal Reserve would intervene in the markets and cut interest rates. U.S. core bonds gained 1.4% and intermediate-term Treasuries rallied nearly 3% in February—with most of that return coming during the final week of the month. Treasury rates fell to all-time lows, with the 10-year Treasury closing the month at 1.13%. This leaves much of the Treasury curve inverted.
When we started writing this update (on March 2), the markets were sharply reacting to a collapse in China’s Purchasing Management Index. Futures had quickly moved to an extreme position and expected with 100% certainty that the Fed would cut the federal funds rate by 50 basis points at their next FOMC meeting on March 18. The next day Fed chair Jerome Powell cut the policy rate by 50 basis points and the market got the rate cut it was expecting two weeks early. This is the Fed’s first emergency rate cut since the financial crisis in 2008. In the Fed’s press release, they wrote: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” It’s difficult to see how a rate cut is going to help. Further, it places policy makers in a no-win situation. Market expectations are running way ahead of reality for what policy makers can and will do.
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