A Tale of Two Cities – Redux
What a difference a quarter makes. You may recall Jon Augustine, in our last Insight, presented a quote from the Charles Dickens novel mentioned above; “It was the best of times, it was the worst of times.” Investors experienced what Dickens captured as the “worst of times” as market volatility surged during the first quarter.
Recall going into Q1 2020 how consumer sentiment was high, economic growth globally and within the United States was anticipated to continue, while inflation was expected to remain subdued. These factors, coupled with continued low interest rates, presented investors with a somewhat optimistic outlook for 2020.
The Shot Heard Round the World
This optimism quickly turned when news from China spread about the coronavirus (COVID-19). What first appeared to be contained within the Hubei province of China quickly spread throughout the globe. China first alerted the World Health Organization (WHO) on December 31, 2019. As news began to focus on this virus, the aura previously exhibited within global capital markets began to fade.
Throughout the world this shot shocked global markets. The virus quickly spread such that, as of late February, WHO reported nearly 167,500 COVID-19 cases had been documented with 6,600 deaths attributed to the virus. The initial focus on China expanded to Iran, Italy and the United States. As of March 31, there have been 750,900 positive cases worldwide.
Governments worldwide, including regional, state and local, all induced quarantines and social distancing to curb the spread of COVID-19. While an unintended consequence, the impact of governmental response globally has suffocated global economic activity. According to FactSet, economists surveyed are projecting first quarter U.S. Gross Domestic Product (GDP) will decline 0.7%. At the end of 2019, economists were projecting GDP growth of 1.7%. This downward revision incorporates a partial impact of COVID-19 on GDP. For the second quarter, economists are projecting a contraction of 11.6%, with GDP expanding by 1.9% and 2.5% during the final two quarters of 2020. At the end of 2019, this measure projected growth of 2.0%, 1.9% and 1.9%, respectively. For all of 2020, economists surveyed by FactSet project a contraction in GDP of 0.7%.
Outside the United States, the Organisation for Economic Co-operation and Development (OECD) revised their economic outlook in March. The OECD now projects annual global GDP growth of 2.4% in 2020, versus 2.9% in 2019. For the first quarter, the OECD anticipates negative growth may be realized.
Within the United States, Congress passed, and the President signed the approximately $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act. This Act, the third aid package from Congress (the first two being $8.3 billion in public health spending and the Families First Coronavirus Response Act, which provides new job protections for workers amongst other mandates) seeks to support businesses and individuals during this unprecedented suppression of the majority of the American population.
Central banks responded, in various forms and at various times, with monetary and quantitative easing. China initiated credit, monetary and regulatory facilities beginning in early February. In the United States, the Federal Open Market Committee, while noting the fundamentals of the U.S. economy remain strong, in March initially lowered its target range for the federal funds rate by 0.5%, to 1 – 1.25% and eventually to 0 – 0.25% given its assessment of the evolving risks associated to COVID-19. Throughout March, the Federal Reserve instituted additional credit and regulatory facilities to support markets. Similar actions were initiated by the Bank of England, the European Central Bank and the Bank of Japan.
A crucial aspect of the overall response and assumptions related to the current market environment has been the impact on confidence, in general, and the integrity of financial markets. It was not all that long ago we dealt with the global financial crisis of 2008. During that event, both governmental and monetary authorities reacted to the near-term events while attempting to ascertain future outcomes. Like that event, the impact of current efforts by these authorities, while well-intentioned and targeted, will be assessed
as we navigate through this current pandemic. Or as the OECD states, “Supportive macroeconomic policies can help to restore confidence and aid the recovery of demand as virus outbreaks ease, but cannot offset the immediate disruptions that result from enforced shutdowns and travel restrictions.”
All indicators are for the global economy to contract in the near-term. Economic reports will continue to incorporate the impact of COVID-19 on the consumer and businesses. Prior strength in consumer confidence is expected to wan. Consumer confidence for March came in at 120.0, not yet fully incorporating the impact of the current economic shut down. Initial jobless claims, for the week ending on March 21, exposed a dismal trend as claims skyrocketed to 3,283,000. For the week ending on March 28, claims more than doubled increasing to 6,648,000. Non-farm payrolls for March declined by 701,000.
The near-term outlook for the economy is exhibited in the trend of manufacturing and service industries. IHS Markit, a global consultancy firm, provides data on both segments. It’s Services measure for March declined to 39.1, while its Manufacturing measure declined to 48.5. Note, for each measure, a report above 50 indicates expansion; a report below 50 indicates contraction.
Asset Allocation – Review & Outlook
Volatility increased during the first quarter and is expected to be heightened in the near-term. The CBOE Market Volatility Index surged above 82.7 in March before settling at 53.5 as of quarter-end. During the quarter, equities underperformed fixed income, as the MSCI All Country World Index declined 21.4% while investment-grade fixed income measured by the Bloomberg BarCap U.S. Aggregate Bond Index advanced 3.2%.
We are maintaining our current allocations, which emphasize equities relative to bonds and favor domestic over international equities. Our process involves a recurring evaluation of our allocations, which exhibit our convictions within the overall investment environment and incorporate the underlying asset classes which comprise client portfolios. The result is a broadly diversified portfolio, even those that are focused within a distinct asset class.
We continue to assess this current environment. With that said, studies have exhibited the benefit of staying invested versus market timing. A validation of client objectives and their associated investment time horizon is warranted in this environment.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involved risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.