Week in Review

Week in Review: March 27, 2020

Fighting the Coronacrisis Part II

As the coronavirus outbreak intensified across the globe, U.S. equities tumbled into bear market territory in just 20 days (spanning from mid-February to early March), as the medical and economic threat posed by the COVID-19 pandemic aggravated investor risk appetite and injected panic into the capital markets. In the process, the major stock indexes set a record for the fastest 20% fall, the traditional definition of a bear market, as investors rushed into U.S. Treasuries and other perceived safe-haven assets. Despite the fallout, equities recovered some lost ground this week, after the U.S. House of Representatives passed a $2.2 trillion coronavirus emergency relief bill aimed at addressing the economic effects of the COVID-19 pandemic. President Trump followed by signing the latest aid package into law Friday afternoon. In turn, investor sentiment surged on optimism that the stimulus package, coupled with the Federal Reserve’s rapid efforts to keep credit flowing, will boost the fight against the virus and help prevent a worst case economic scenario from unfolding.

Extraordinary times and extraordinary measures

The relief bill, the largest economic rescue package in U.S. history (see Figure 1), includes direct payments to individuals, stronger unemployment insurance, loans and grants to businesses, and more healthcare resources for hospitals, states and municipalities. Investors also welcomed reassurance by the Federal Reserve that it would continue to act “aggressively” to provide liquidity and support to credit markets. To this day, the Fed has cut its benchmark interest rate to nearly zero, embarked on an unlimited bond-buying program to inject cash into the financial system, and set up several emergency programs intended to ensure that financial institutions can keep lending to companies and city and state governments. 

The week’s gains also came as President Trump signaled that he was eager to reopen the U.S. economy in a matter of weeks, even as public health officials warn that easing restrictions too early could possibly overwhelm the healthcare system and lead to even more infections and economic damage. 

However, the containment measures enacted to mitigate the spread of the virus are exacting an increasingly costly toll on the U.S. economy, as thousands of businesses have been forced to close amid government-mandated stay-in-place orders, leaving an unprecedented number of Americans out of work. As a result, nearly 3.3 million Americans applied for unemployment benefits last week — the highest number of initial jobless claims in history. Further, the number of U.S. infection cases has spiked significantly in recent weeks. At the beginning of March, the country had reported only about one hundred cases of infections. On Thursday, the number of cases in the U.S. surpassed every other country in the world, including China, where the outbreak began. We anticipate that as the number of COVID-19 cases in the U.S. continues to grow, so will jobless claims, and the unemployment rate will rise. 

Risks force us to remain vigilant

While the size and pace of recent policy responses enacted to fight off the “coronacrisis” are encouraging, some market participants are raising warning signs that investors should be careful of calling a sustainable rally too early, especially without clear evidence that the COVID-19 outbreak will be contained soon. For one, economic estimates increasingly point that a recession seems inevitable. Consumer sentiment dropped nearly 12% in March — the fourth-largest one-month decline in nearly 50 years, according to data published on Friday. Further, analysts are slashing their Q1 corporate earnings forecasts and even withdrawing revenue guidance. Forecasters say they cannot project how deep the downturn might be or how long it will last. On the medical front, the number of cases in the U.S. and globally still haven’t shown a sign of peaking. Over 600,000 cases have been confirmed worldwide, including over 90,000 in the U.S., according to Johns Hopkins University. As a result, Andy Laperrier of Cornerstone Macro highlighted that he believes it won’t be until late June or July when we will see the peak in the epidemic curve — a significantly longer timeline than some politicians are currently indicating. During a town hall on Tuesday, President Trump reiterated he was eager to see the nation return to normal activity “in a matter of weeks, not months.” 

First in, first out: How China’s economy may offer a glimpse of the future 

Three months after the novel COVID-19 was first reported in Wuhan, the epicenter of the virus, China appears to have successfully dampened the rate of new infections, as the number of local transmission cases were reported near zero. While the preventive measures put in place at the beginning of the year have so far proven effective in curbing the spread of the virus, such moves have also resulted in significant economic trade-offs. During the January-February period, China’s urban unemployment spiked to its highest level on record. Additionally, home sales plunged by one-third, fixed asset construction activity fell by almost one-quarter, and retail sales dropped by one-fifth. Similarly, industrial output contracted at the fastest pace in decades. While somewhat expected, the acute financial hit has led economists to project the Chinese economy to contract this quarter. On a positive tone, Chinese factories are now gradually getting back on their feet, and people are starting to go back to work, as the government has begun slowly lifting some restrictions and travel bans. 

According to Nancy Lazar from Cornerstone Macro, Beijing is likely to continue enacting aggressive policies going forward designed to stabilize employment, growth and key prices, while portraying its economic and political model as one offering stability and global leadership. Now, with new daily cases dwindling in the mainland, China is mounting a humanitarian aid campaign in countries struggling with their own outbreaks. From Italy to Iraq, Spain to Chile, it has provided or pledged assistance in the form of donations or medical expertise to various nations around the globe.  

Searching for a bottom: A strong recovery will require strong containment 

On the back of Tuesday’s rally, a number of asset allocators are increasingly beginning to time a bottom for clients in the battered stock market. While this week’s gains mark a sign of at least a short-term capitulation, investors trying to assess when to jump back into the market should continue to exercise extreme caution, dispassionate patience and discipline. Further, some strategists have warned of temporary market bottoms, stating that while equities have surely already priced-in a huge amount of bad news, markets could still retest previous lows as the real pivot may come when there are clear signs the number of new cases of coronavirus have peaked in the U.S. and there is a new level of visibility on the economic impact and earnings hit from the virus. In the meantime, sharp market swings and heightened volatility will likely continue until we reach a tipping point and we begin to see a sustainable recovery in equity prices. As a point of historical reference, bear markets have averaged declines of about 38% over 20 months according to Strategas.

On a reassuring note, fiscal offsets bridging the gap to peak cases are incredibly important, and there are some important technical signs that the market could be on the mend. The number of 52-week lows on the New York Stock Exchange peaked on March 13, as did the put-call ratio. The CBOE Volatility Index peaked March 18 at a record high, and short-term momentum indicators are showing signs of decelerating and turned positive last week into this week. Additionally, history shows that the biggest stock market jumps have come after giant plunges. The giant crash of Oct. 19, 1987, was followed by a 10% surge in the Dow (DJIA) on Oct. 21. The worst two days of the famous Wall Street Crash of 1929, on Oct. 28 and Oct. 29, were followed by a massive 12% surge in the Dow on Oct. 30 — the market’s third best day ever in percentage terms. The 10% plunge on March 12 of this month was followed by a 10% rocket on March 13.

Investors turning to active management

The bull market of the past decade provided a benign backdrop where buying beta through passive strategies was very fruitful, but we are now entering very different times. The sharp decline in equity markets has seen a rise in volatility that manifests itself as both higher dispersion and correlation rates. Higher dispersion (which measures the average difference between the return of an index and the return of each of the index’s components) means that the value of selection skill rises, while higher correlation (the gap between the best performers and the worst performers) means that the volatility gap between active portfolios and index funds declines. With the leading U.S. indexes still down double-digit percentage points from their recent highs, some market experts believe that the current market dislocations create an environment where active managers may be able to purchase stocks of quality companies at attractive valuations. According to a recent report from S&P Global, the value of stock-selection skill rises when dispersion is high: a larger gap between winners and losers means that active managers have a better chance of displaying their stock-selection abilities. Going forward, investors with cash at hand and a long-term investment horizon should pick carefully as they re-enter the market, focusing on quality companies instead of trying to time when the market as a whole is likely to bottom or rebound. Our advice rests on the notion that the underlying economic fundamentals of the U.S. economy are not broken, but are delayed, and that the speed of the response by policymakers has worked to, so far, stave off much worse outcomes. We anticipate that if containment measures prove efficient, the massive mobilization of fiscal and monetary measures can return the U.S. economy towards a growth path in 2021.

A look forward: Reasons for optimism

While it is impossible to play out every scenario of what could or might happen, and many scenarios are scary, the recent medical response and stimulus have helped assuage worries about the worst possible economic outcomes for individuals and companies. Looking forward on the investing front, for clients with new cash and a long horizon, the stock market sell-off has presented a number of bargains. Average stocks are still down double digits and built in expectations of a recession. At current valuation levels, we would recommend beginning the process of selectively buying high-quality, low-leverage companies. Within the market spectrum, we would focus on companies in Healthcare, Technology and Consumer Staples, due to the reasonably safe dividend yields that are currently significantly higher than U.S. Treasuries.  As for asset allocation, we believe investors that are fully invested should consider rebalancing toward their long-term allocation levels, albeit following a slow, time-based approach — move a little bit every week or month to take the volatility out of the decision making. Looking at portfolio management, we believe it is prudent to hold a bit of extra cash, to keep your bond maturities shorter than usual (but to look for relative value). For equities, the message is focus on upgrading your portfolio; raise exposure to U.S. assets and continue to maintain an underweight positioning to Emerging and International Markets. For taxable investors, looking for opportunities to harvest tax losses is also important as market turbulence remains high.

Figure 1: A comparison of stimulus packages

2020 stimulus

Source:  St. Louis Federal Reserve analysis of Recovery Act and New Deal; Bureau of Labor Statistics inflation calculation

Market Returns (USD)





Global Equities

MSCI All Country World

10.8% -20.6% -20.6% -10.0%

S&P 500

9.2% -18.2% -18.2% -4.8%

Dow Jones Industrial Average

12.3% -20.5% -20.5% -9.9%


9.1% -12.9% -12.9% 2.5%

Russell 2000

11.5% -29.0% -29.0% -21.6%

First Republic Founders Index

13.8% -22.4% -22.4% -

Russell 1000 Equal Weighted

11.3% -26.6% -26.6% -20.1%


13.0% -23.0% -23.0% -14.5%

MSCI Emerging Markets

11.1% -23.4% -23.4% -16.8%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

4.1% -0.6% -0.6% 2.9%

Bloomberg Barclays Intermediate Government/Credit

1.4% 1.6% 1.6% 6.0%

Bloomberg Barclays High Yield Bond

2.8% -15.3% -15.3% -9.5%

JPMorgan GBI Emerging Markets Global Diversified

5.4% -14.3% -14.3% -6.4%

Market Levels


Week Ago

Year End

Year Ago

S&P 500

2630.07 2409.39 3230.78 2805.37

Dow Jones Industrial Average

22552.17 20087.19 28538.44 25625.59

10-Year U.S. Treasury Yield (Constant Maturity)

0.83% 1.12% 1.92% 2.39%

Gold ($/oz)

$1,631.34 $1,471.24 $1,517.27 $1,309.55

Crude Oil ($/barrel)

$22.60 $25.22 $60.41 $59.41

U.S. Dollar / Euro ($/)

1.10 1.07 1.12 1.12

U.S Dollar / British Pound ($/£)

1.22 1.15 1.33 1.32

Japanese Yen / U.S. Dollar (¥/$)

109.58 110.71 108.61 110.51