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April 8, 2020
The global spread of the COVID-19 virus, which originated in China at the end of 2019, was the catalyst for an unprecedented global economic decline and the worst quarter of equity performance since the great financial crisis of 2008. To further emphasize the magnitude, it was the fifth-worst quarter in the last 75 years. Small and mid-capitalization U.S. equities and international equities fared even worse as quarantines and mobility restrictions led to closures and dramatically reduced demand in many industries, especially leisure, hospitality and travel. By no means was the carnage limited to those sectors, eventually the closures and restrictions were imposed on all non-essential manufacturing facilities. The immediate impact of these mobility policies was the end of the longest economic expansion and the longest bull market in U.S. history. Asset price declines were not limited to the equity markets. Both investment-grade and high-yield corporate bonds saw substantial price declines in March as investors adjusted to the oncoming recession.
Besides Treasury notes, there were very few safe havens amidst the market storm. The dollar outperformed most other currencies despite the aggressive Fed ease. Investors tend to repatriate their assets in a crisis, and dollar-based investors dominate the roster of market participants. Gold, another beneficiary of Fed easing, generated a positive return for the quarter. This commodity tends to benefit when central banks flood the market with newly printed currency.
Focus now shifts to second quarter as investors and analysts alike brace themselves for weak economic reports and continued volatility.
The coronavirus pandemic has brought global economies to their knees over the past month. All eyes are focused on the Asian economies, especially China, as they begin reopening their societies and resuming production. Not surprisingly, these countries are expected to report a sharp decline in first-quarter GDP growth later this month. Any notable rebound in emerging market economies isn’t likely to occur until fourth quarter at the earliest now that the virus has taken hold in developed countries. Exports to developed markets are a key component of many emerging market economies. Here in the U.S., mobility restrictions didn’t begin in earnest until mid-March. So, first-quarter GDP growth is expected to hover around 0%, followed by a much steeper decline in the second quarter. We are currently forecasting a “U-shaped” recovery, which would imply continued economic weakness in the third quarter before a notable rebound in the fourth quarter. As European economies were already teetering on the brink of recession before the virus, their recessions may be deeper and longer-lasting, especially in Italy and Spain. Aggressive fiscal and monetary policy responses are especially important in these countries to support individuals and businesses.
While monetary policy is essential for providing liquidity to the financial system, fiscal policy is key for supporting displaced workers and preventing mass business closures and bankruptcies in our current environment. After two relatively small stopgap initiatives, Congress passed a $2.2 trillion relief package targeted to individuals, hospitals, small businesses, and corporations. A fourth fiscal relief package will probably only happen if it becomes apparent more government assistance is needed.
Over the coming months, the spread of the virus and the duration of the resulting mobility restrictions will be the most significant drivers of market sentiment. China’s experience in reopening its economy, and hopefully, not seeing a recurrence of the virus may help inform the timing of a return to some sense of normalcy in developed markets.
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Ben Pace, James Lebenthal and Christian Thwaites
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