Global Macro Environment

Global Economy in the Midst of a Recession
A global recession is underway as COVID-19 cases increase around the world. Fear has set in as consumers are not spending, firms face down bankruptcy, and unemployment skyrockets. The GDP numbers in the next quarter or two will be some of the worst on record since the Great Depression. Unlike the Great Depression or the Global Financial Crisis (GFC), which were both caused by excesses in the financial system, the pandemic is an exogenous event. Simply put, the COVID-19 virus has left countries around the world with one short-term option: shut down economic activity to try and slow the spread while a possible vaccine is developed. In the US, this strategy has led to 10M initial jobless claims in the last two weeks. Employers shed 701,000 jobs in March, the start of a labor-market collapse that could push the US unemployment rate to record highs. The unemployment rate for March rose to 4.4% from 3.5% in February. These employment numbers do not fully reflect the millions of individuals who recently filed for unemployment insurance. The St. Louis Federal Reserve research indicates at this pace the US unemployment rate could touch 32% in the next several months, depending on how long the US economy stays locked down. The Institute of Supply Management Manufacturing Purchasing Managers Index for March came in better than expected at 49.1, however, the low New Orders reading of 42.2 confirms that a continued slowdown is likely.

In Europe, economic data is worsening as shutdowns and social distancing take place across the bloc. The IHS Markit Eurozone PMI Composite Output Index, which includes manufacturing and services, experienced its largest single monthly fall in March to a record low of 29.7, down from 51.6 in February. Given the spread of COVID-19 across Europe, and the subsequent measures taken to contain the virus, this was not a surprising result.

Recent data in China showed that economic activity experienced a sharp “V” recovery. Manufacturing PMI rebounded from an all-time low of 35.7 in February to an expansionary reading of 52.0 in March. Nonmanufacturing, similar to manufacturing, rebounded from an all-time low of 29.6 in February to an expansionary reading of 52.3 in March. It is important to note that this data comes from the Chinese government. Activity in China may be picking up locally, but the global economy is still shut down which is a headwind for this prominent export nation.

Massive Stimulus in Response to Pandemic
In a lesson learned from the GFC, the Federal Reserve (FED) responded more quickly and with more measures this time around. In addition to unlimited treasury and mortgage backed securities (MBS) purchases, the monetary response included the return of lending and purchasing facilities in an attempt to provide liquidity to the market. Following the FED, congress eventually passed the $2T stimulus bill now known as the CARES Act. A high-level breakdown of the bill is below*:

• Approximately $500B in direct payments to families
• $500B in loans to hard-hit industries
• $350B in loans to small businesses
• $250B in unemployment aid
• More than $100B for hospitals and health care systems
• $150B to help state and local governments fight the virus

Market Observations

US Equities
The longest bull market in history ended on March 12 and US equity performance had the worst quarter since the 2008 financial crisis, pummeled by fallout from the coronavirus. It seems a distant memory but the S&P 500 was up (+5%) through mid-February. However, the second half of the quarter pulled down performance and the index finished down (-19.6%) at the end of March. Large cap growth (-14.1%) outperformed large cap value (-26.7%) over the quarter. Small cap equities were hit especially hard as the Russell 2000 index returned (-30.6%). Information technology (-11.9%) led sector performance, while the energy (-50.5%) sector suffered the most due to the massive plunge in oil prices.

International Equities
In times of crisis, equity market correlations rise and stocks in all geographies and sectors decline. This was the theme for market performance overseas. Developed international equities were down (-22.8%) at the end of March, while emerging markets finished (-23.6%). The viral outbreak and supply chain disruption negatively impacted returns in the back half of the quarter.

Fixed Income
The 10-year treasury yield has dropped from 1.9% at the turn of the year to as low as 0.3% on March 9 before ending the quarter at 0.7%. Investors piled into safe-haven assets resulting in the Bloomberg Barclays US Aggregate Index returning (+3.2%). In the middle of March credit markets saw a sharp widening in treasury bid-ask spreads, LIBOR-OIS spreads and commercial paper T-bill spreads due to disruption in the repo market. This liquidity crunch was the event that ultimately led the FED to intervene swiftly and set up the lending facilities (discussed on page 1). The Bloomberg Barclays Municipal Aa+ 1-10 Year index was down sharply as mutual funds endured significant outflows, but fully recovered by month end.

Real Assets
Real assets experienced a difficult quarter as Master Limited Partnerships (MLPs) (-57.2%), natural resources (-32.9%) and real estate (-28.5%) all saw dramatic declines. Oil prices suffered as Saudi Arabia and Russia squared off in a market share war. The price tumbled to an eighteen year low in late March but has risen recently on the hopes for a truce between the two countries and the possibility of US action via the Texas Railroad Commission.

*Source: BCA Research

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 4.9.20 and is subject to change at any time due to market or economic conditions or other factors. Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.