When the market lost 3% in a day last week, was it because of coronavirus news or because the Federal Reserve unnerved investors? When it was up 4%, was it because the Fed had reassured us all or because Joe Biden had smashed “Super Tuesday”?
Getting a read on daily market movements is nearly impossible right now. But that’s because getting clarity nine months out has become equally difficult.
When we looked forward into 2020 late last year, we said volatility would likely be stronger and longer. The causes of volatility we identified—the U.S. election and the increasingly limited effectiveness of monetary policy—would be sources of medium- rather than short-term uncertainty.
The coronavirus outbreak takes that theme and amplifies it. When a new economic data release leads to repricing, it happens in days if not hours. The major, interacting themes twisting markets today are different. They are not only a source of radical uncertainty; they will be a source of uncertainty for months.
Investors could benefit by being prepared for the long haul.
While the coronavirus appears to have peaked in China, the first economic data to reflect its impact were worse than expected. Purchasing Managers Indices (PMIs) for China fell to unprecedented lows. The China Passenger Car Association reported February car sales down 80%, year-over-year.
That is a worrying indication of how bad the economic hit could be if the disease gets a similar hold outside China.
The number of cases recorded in the manufacturing heartland of Italy has raced past 3,000, prompting the government to close schools and warn that its health system might not cope. Two weeks ago, the International Air Transport Association was forecasting industry losses of $30 billion. Following a wave of flight cancelations and travel bans, it now says the impact could be four times as big.
There is real cause for concern, and it will be weeks, at the earliest, before we can be clear that we have avoided the worst outcomes.
The impact of the viral outbreak will be affected, of course, by the responses of global policymakers. As Joe Amato argued last week, the current crisis could make much-needed fiscal stimulus more likely. The G7 have signaled their readiness to take fiscal action “where appropriate,” the U.S. is approving an $8 billion emergency funding package and we have seen a variety of measures in Asia and Italy. Elsewhere, we are still at the talking phase, and even if governments sign off on support, the effects may not be evident until well after the virus itself has receded.
The Fed has stepped in with its first 50-basis-point move since the financial crisis. That came after a conference call between G7 finance ministers and central bank governors but, unlike during 2008 – 09, there were limited signs of real coordination.
The Bank of Canada followed the Fed’s lead with a cut and the Reserve Bank of Australia said it could deploy quantitative easing. The Bank of England, the Bank of Japan and the European Central Bank responded tepidly, however. They have less room for maneuver and arguably face greater skepticism about the efficacy of adding monetary stimulus.
In any case, investors responded negatively to the Fed’s intervention, sending stock markets down and the U.S. Treasury yield below 1% for the first time. Even on the stock market’s up days last week, it was led by traditionally defensive sectors such as utilities and, unsurprisingly, health care. Treasury yields are still plumbing historic lows. Rates markets are already forecasting that the Fed will go to zero, which could leave it with little ammunition to fight the next cyclical downturn.
Was the rate cut a decisive move, a recklessly early use of dry powder, or a response to a lack of fiscal commitment? It will be some time before we know the answer, and until then it will be difficult for investors to have confidence.
Some relief did come on Super Tuesday, with Joe Biden’s comeback in the race to become the Democratic candidate for U.S. president. After Bernie Sanders had established a considerable early lead, Biden’s success was enough to persuade the rest of a divided centrist pack to end their bids and back his candidacy.
Investors cheered, as a consolidated moderate vote looks more likely to deliver Biden a plurality of delegates. Some political risk has been lifted.
Nonetheless, the path to a majority of delegates remains unclear. That probably leaves Sanders in contention until the Democratic Convention in mid-July. Sanders owns the progressive vote now that Elizabeth Warren has bowed out and there are two more big Tuesday votes and a debate to come this month, any of which could stymie Biden’s progress.
Uncertainty for the Long Haul
Last week was significant. Volatility was high but markets became two-way again, after several days without support.
We would caution against assuming that we have seen the bottom or that volatility will now recede, however. We are currently dealing with uncertainties rather than mere risks—binary, interacting uncertainties that will remain in play for the long haul. Once again, it’s worth emphasizing that the U.S. consumer is a critical indicator. Friday’s nonfarm payrolls data brought some reassurance, but any weakening in consumer spending or the jobs market would signal a major threat to growth, triggering a further sell-off but perhaps also a more meaningful fiscal response.
As Joe Amato put it last week, if portfolio risks are not already balanced to face these uncertainties, it is not too late to use rallies as an opportunity to reduce risk. For the time being, in our view market volatility is still best used to rebalance rather than to position aggressively.
In Case You Missed It
- U.S. ISM Manufacturing Index: -0.8 to 50.1 in February
- European Consumer Price Index: +1.2% year-over-year in February
- U.S. ISM Non-Manufacturing Index: +1.8 to 57.3 in February
- U.S. Employment Report: Nonfarm payrolls increased 273,000 and the unemployment rate decreased to 3.5% in February
What to Watch For
- Monday, March 9:
- Japan 4Q 2019 GDP (Final)
- Tuesday, March 10:
- Euro Zone 4Q 2019 GDP (Final)
- Wednesday, March 11:
- U.S. Consumer Price Index
- Thursday, March 12:
- U.S. Producer Price Index
- European Central Bank Policy Meeting
Statistics on the Current State of the Market – as of March 6, 2020
|S&P 500 Index||0.6%||0.6%||-7.7%|
|Russell 1000 Index||0.4%||0.4%||-7.7%|
|Russell 1000 Growth Index||0.9%||0.9%||-3.8%|
|Russell 1000 Value Index||-0.1%||-0.1%||-11.7%|
|Russell 2000 Index||-1.8%||-1.8%||-13.0%|
|MSCI World Index||0.5%||0.5%||-8.5%|
|MSCI EAFE Index||0.4%||0.4%||-10.6%|
|MSCI Emerging Markets Index||0.7%||0.7%||-9.1%|
|STOXX Europe 600||0.7%||0.7%||-10.8%|
|FTSE 100 Index||-1.6%||-1.6%||-13.4%|
|CSI 300 Index||5.0%||5.0%||1.0%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.6%||0.6%||2.0%|
|Citigroup 10-Year Treasury Index||1.9%||1.9%||9.3%|
|Bloomberg Barclays Municipal Bond Index||0.3%||0.3%||3.4%|
|Bloomberg Barclays US Aggregate Bond Index||1.9%||1.9%||5.7%|
|Bloomberg Barclays Global Aggregate Index||2.5%||2.5%||4.5%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-1.0%||-1.0%||-2.8%|
|ICE BofAML U.S. High Yield Index||-0.4%||-0.4%||-2.0%|
|ICE BofAML Global High Yield Index||0.2%||0.2%||-1.3%|
|JP Morgan EMBI Global Diversified Index||1.1%||1.1%||1.7%|
|JP Morgan GBI-EM Global Diversified Index||1.6%||1.6%||-3.1%|
|U.S. Dollar per British Pounds||2.0%||2.0%||-1.6%|
|U.S. Dollar per Euro||3.0%||3.0%||0.8%|
|U.S. Dollar per Japanese Yen||2.4%||2.4%||3.2%|
|Real & Alternative Assets|
|Alerian MLP Index||-9.9%||-9.9%||-26.9%|
|FTSE EPRA/NAREIT North America Index||3.1%||3.1%||-4.1%|
|FTSE EPRA/NAREIT Global Index||2.9%||2.9%||-5.2%|
|Bloomberg Commodity Index||-0.2%||-0.2%||-12.2%|
|Gold (NYM $/ozt) Continuous Future||1.8%||1.8%||9.8%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||-12.3%||-12.3%||-32.4%|
Source: FactSet, Neuberger Berman.