Global Macro Environment

Global Growth Slows As COVID-19 Spreads
Supply chains are being disrupted, oil prices are plummeting and schools in the US are starting to close. Risk of a recession has risen in the last few weeks as efforts to stop the COVID-19 virus via quarantines are having a negative economic impact. The US consumer has been the workhorse holding up the global economy but it remains to be seen if this can continue, especially if the virus effects causes schools to close and/or factories to shut down nationwide. Congress passed an $8B emergency spending bill last week to support the virus response. It seems a further coordinated response is likely as risks grow with both the human cost of the virus (health) and the cost of a recession (economic). One positive area of the US economy continues to be housing. With the entire yield curve below 1%, every mortgage in the US is a possible refinance candidate. A spike in such activity could provide additional spending for the US consumer. Finally, employers added 273,000 jobs in February and the jobless rate was 3.5%, signs of labor-market strength before COVID-19 spread widely in the US. Wages increased 3.0% from a year earlier in February, consistent with recent months.

China’s Manufacturing Purchasing Managers Index (PMI) plunged to a record low of 35.7 in February vs. 50 in January. This result means a sharp contraction is likely and some research providers have forecasted a (-5%) fall for GDP quarter over quarter annualized. China decided that their “antidote” for the COVID-19 virus was to shut the economy down. The effects look increasingly likely to linger into the second quarter as well.

Leading indicators were improving in Europe but the COVID-19 virus is now interrupting that recovery. Average lead times for the delivery of inputs lengthened significantly in February signaling supply-side constraints. According to European manufacturers, the COVID-19 virus-related factory shutdowns in China are linked to the decline in vendor performance.

Given the current global economic climate, coordinated action to aid growth seems more and more likely. The G7* announced they are ready to cooperate on actions to support the economy and guard against risks from COVID-19. Other recent policy responses are detailed below:

• February 26 – Hong Kong’s government announced stimulus measures worth HK$120B.
• March 1 – Italy’s government announced a 3B Euro stimulus package.
• March 3 – World Bank announced it would make available up to $12B in funding for countries to improve their responses to the COVID-19 outbreak.
• March 4/5 – House and Senate passes $8B emergency COVID-19 funding package.

Fed Cut 50bps In Emergency Move
The Federal Reserve cut 50bps last week in an emergency move that was unanimous by the FOMC. The market believes this wasn’t enough and is currently placing an 85% probability of the Fed cutting rates by 75bps at the next meeting. If additional rate cuts do occur, rates would be just above the zero bound, leaving the Fed with little ammo if a recession were to occur.

Market Observations

US Equities
US equities experienced a very difficult February. The week of February 23 was the fourth worst week since 1950, as US equities lost over (-11.4%). February 24 and 25 trading days both saw a decline of 3%. For the month, the S&P 500 was down (-8.2%) and small cap stocks via the Russell 2000 fell (-8.4%). The sell-off has continued in March with more than 45% of the companies in the S&P 500 down at least 20% as of March 6. Global supply chain disruptions continue to weigh on American companies that are exposed to China. The energy and financial sectors were hit the hardest during the month and travel-related companies, such as airlines and hospitality stocks, continue to suffer.

International Equities
International economies tend to be more trade dependent and thus are more sensitive to economic conditions in China. As a result, the viral outbreak and supply chain uncertainty negatively impacted returns for the month. Developed international was down (-9.0%) while emerging markets finished (-5.3%). Once the viral outbreak becomes contained, the improved economic picture and cheap valuations relative to the US could provide a tailwind for international equities.

Fixed Income
The 10-year treasury yield fell below 1% for the first time after the Fed cut rates and since has continued to hit new lows. Investors piled into safe-haven assets resulting in a positive month for the Bloomberg Barclays US Aggregate Index (+1.8%). Investment grade spreads currently remain okay but high yield spreads significantly increased, up to 550bps, on March 6. Given the weight energy companies have in the high yield space, this result wasn’t a complete surprise.

Real Assets
Real assets experienced a difficult month as MLPs (-14.1%) and natural resources (-11.3%) saw double digit declines, while real estate was down (-8.2%). Oil prices have now fallen to multiyear lows as the Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to reach a deal for production cuts amid sinking demand caused by COVID-19. Saudi Arabia then announced it would unleash a torrent of crude into well-supplied energy markets setting up a possible market-share war that has no end in sight.

*Includes Canada, France, Germany, Italy, Japan, UK and US Source: Strategas

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 3.12.20 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.