Last week brought a significant rally for risk assets, but are we just in the eye of the storm?

Our Top Market Takeaways for March 30, 2020.


Eye of the storm?

Last week, the robust policy response from governments and central banks around the world outweighed the dire headlines around the spread of COVID-19 and the first wave of dreadful data on economic activity. The S&P 500 was up +10.3%, the Stoxx Europe 600 was up +6.1%, the MSCI China was up +4.6%, and Japan’s TOPIX gained +13.7%. U.S. investment grade and high yield bond spreads tightened by 66 and 104 basis points, respectively, having one of their best weeks since the Global Financial Crisis. This kind of “risk on” performance is all the more notable, given that there are now over 700,000 confirmed COVID-19 cases around the world, New York City itself is the new epicenter of the crisis, 3 million Americans filed initial unemployment claims, and flash PMI readings came in at their worst levels on record.

Is the worst of the storm behind us? An optimist would be encouraged that risk assets like stocks and high yield bonds rallied in the face of the historically poor employment data in the United States and a COVID-19 situation that is far from under control. It suggests that markets have already adjusted to the sudden stop in economic activity and have deemed the fiscal and monetary response as powerful enough to cushion the fallout. Specifically, the Fed’s efforts seemed to have calmed the turbulence in fixed income markets (U.S. 10-year Treasury yields traded in a relatively narrow range, and as mentioned before, credit spreads have started to stabilize), and the unprecedented CARES Act seems well designed enough on paper to help get businesses through the disruption and replace the lost income of those who have already been laid off. For a more in-depth overview on the stimulus package, don’t miss our piece from last Thursday.

Chart shows U.S. 10-year Treasury yields from March 1, 2020, through March 29, 2020. The chart highlights that the yield dropped significantly from March 1 to March 10, then recovered to reach levels higher than the beginning of the month by March 20, then declined again by March 23. However, since March 23, levels have remained relatively stable.

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A pessimist would point out that much of the rally in the United States was driven by short covering (stocks like Norwegian Cruise Line and Boeing were up +37.8% and +70.5%, respectively), that not all of the Fed’s new facilities are up and running yet, and that the logistical hurdles facing the timely distribution of loans and support to businesses and households are daunting. The only certainty with the virus is that we have several weeks of challenging headlines ahead of us, and that would be in a best-case scenario. Plus, we’ve seen intra-bear market fits and starts before—in the six months leading up to the S&P 500’s Global Financial Crisis trough in March 2009, the Index mustered 10%+ rallies on multiple occasions.

Chart shows the S&P 500 Index from September 2008 to April 2009, highlighting that during this time period, the Index was gradually declining, but continued to see multiple rallies of 10% or more as Congress passed a $700 billion bailout bill and the Federal Reserve launched a commercial loan program. However, only after multiple rallies did the Index hit its bottom in March 2009.

Our verdict is that last week was like the eye of a storm: A brief respite before more volatility ahead. While the powerful response from policymakers has reduced the likelihood of the worst-case scenario, we think we are far from having an “all clear” for risk assets. That is why we are focused on specific areas where we see the most value: high yield and investment grade credit, high-quality companies linked to mega-trends, and diversifiers like gold.

What happened over the weekend?

  • COVID-19’s human toll grew more dire. Deaths related to the virus in Italy and Spain notably rose above 17,000—more than five times the fatalities reported in China and over 50% of the world’s total. The death toll in the United States is now over 2,000, with 776 in New York City alone. The human impact has been devastating, and all are looking for any signs that the spread of the virus will abate. Some early indications suggest that we may start to see some stabilization—while the numbers are still rising, the pace of new fatalities in Spain has slowed for three straight days; deaths in Italy have declined for two consecutive days; and new infections in both countries are rising at a slower pace.
  • Some good news: Governments continue to do whatever it takes to combat the economic fallout of the outbreak. After President Trump officially signed the CARES Act into law this weekend, Japanese Prime Minister Shinzo Abe was the latest to join in on fiscal stimulus efforts, planning to submit another budget within the next 10 days to help fund an unprecedented stimulus package. Malaysia and Australia likewise enhanced fiscal stimulus efforts, and China announced that ramped-up measures are on the way. Finally, lawmakers in Washington, D.C. are said to already be contemplating a fourth relief package, although details are likely to be contingent on the length of outbreak and economic toll.
  • On Sunday night, President Trump announced that the government would extend social distancing guidelines through April 30. The near-term market impact remains to be seen, but we think, this likely reduces the risk that a hasty return to work would cause a second surge in new case growth.
  • Oil prices continue to plummet as the Saudis and Russians became more entrenched in their fight for market share, and COVID-19 lockdowns have hit demand and stymied production. Brent crude fell to its lowest levels in 17 years, at around $22 per barrel.
  • Some governments are taking new approaches to their containment strategies, including punitive measures against those who don’t abide by the governments’ directions. The United Kingdom cracked down over the weekend, with police officers doling out on-the-spot fines to those disobeying recent guidance. Similar fines (and in some cases jail sentences) have also been imposed for those who don’t comply in Spain, Italy, France, Australia and Singapore, among others.



All market and economic data as of March 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

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