DJIA daily moves of -2,013, +1,167, -1,464, -2,352, and +1,985 added up to the end of a historic 11-year bull market and show as well as anything that the market is struggling to quantify where to go from here. Markets priced in global recession as a fait accompli as we all debate the duration and depth of both economic and financial market downturn – which is really a shame given the strengthening trend in the global economy (Fed stimulus, Citi Econ Surprise Indices, survey data, etc..) that was in place leading up to the coronavirus outbreak and oil price collapse.

Our base case remains that this is a liquidity crisis, not a solvency crisis with the expectation that monetary and fiscal forces will maintain financial market solvency. That said, deflationary shocks and tangible earnings/growth headwinds are inevitable with the magnitude still unclear. Ultimately, if hygiene and social distancing turn out to be enough, the economic hit should be relatively short and manageable. However, if global viral pandemic translates to mass quarantines and long-term business closures, the damage could be significant. The coming weeks should provide indication as to whether Western nations can replicate the success of Eastern nations like South Korea, China, and Singapore which have implemented successful containment measures. We continue to believe this market represents an opportunity for long-term investors to judiciously rebalance portfolios given record low bond yields and real value across global equities contingent on successful monetary/fiscal stimulus across the world. The first signs of daylight (CoVid-19 curve flattening or oil production cuts) should sprout renewed optimism across risk markets.  Investors must be properly positioned at that time to participate in what may be a cycle of relatively quick re-pricing of risk.

Market Anecdotes

  • Johns Hopkins CoVid-19 resource center is signaling several trends, both hopeful and anxiety provoking. The WHO declared the coronavirus a global pandemic on Wednesday.
  • Risk markets were dealt two severe blows last week, sweeping global coronavirus concerns and plummeting oil prices, which combined to throttle global equity markets. Monday and Thursday were among the worst days in U.S. equity market history while Friday was among the best.
  • The Sunday afternoon Russia – OPEC standoff surrounding oil production quotas sent oil from $41.57 to $32.93 representing a real problem for shale producers and Russia as well.
  • The market implosion has pressed policy makers into action.
  • The Treasury announced a $1.5t short-term lending stimulus package.
  • The Fed bought $37b of UST on Friday, expanded repo market operations, lowered the discount window rate for ST bank loans, made an unprecedented second emergency reference rate cut of 100bps to the 0% boundary, ramped up a USD liquidity program with five other global central banks, moved on bank capital buffers, addressed reserve requirements, and announced a new $700b round of QE.
  • U.S. leadership gaffs on Wednesday were followed by more concrete fiscal and leadership protocols Friday and over the weekend including declaration of national emergency ($50b of funding), PP partnership testing protocols, and legislation affording additional fiscal support to industries and households.
  • The 10yr U.S. treasury traded at new record lows (0.31%) but finished the week (0.95%) close to where it began. The USD and VIX both exploded higher in a classic panic and struggle to price risk. The trade weighted USD hit a record high dating back to 1994.
  • Yield curve slope and inflation breakevens saw 2y/10y (45bps) and 3m/10y (66) surge higher while UST breakevens plummet (5yr 180 to 125) and (10yr 171 to 96).
  • Spreads in junk bonds finally succumbed this week and gapped out to 726, a level not quite as wide at 2016, but clearly signaling stress, particularly among small and mid-sized oil producers.  Loans fell to record lows not seen since the depths of 2008 at $0.87 and spreads of 800bps.

Economic Release Highlights

  • February CPI came in right at expectations with headline and core registering 2.3% and 2.4% respectively.  No surprises here with any unanticipated impact on Fed policy.
  • NFIB Small Business Optimism Index registered 104.5 (103.7e), holding the nice move higher in January but precedes the late February/March coronavirus scare.
  • UofM consumer sentiment came in below expectations at 95.6 and was largely before CoVid-19 hit the markets.
  • Wednesday’s EIA oil inventory report, while not factoring in the Russia-OPEC news, certainly did not help oil markets by reporting 7.664mm bbls versus 1.572mm bbls forecasted.