Signal Strength: Interrupted.
The last week of February saw $3 trillion in market value vanish from U.S. stocks.
February Market Review*
The S&P 500 Index returned -8.23%.
The Bloomberg Barclays U.S. Aggregate Bond Index returned 1.80%.
Fed Funds Target Range: 1.00 – 1.25% – as of 3/3/2020.
Growing fear of a coronavirus pandemic sparked a pullback in equity markets in January, but the first two weeks of February provided some relief. Markets rose on the Fed’s economic outlook comments, and good news on earnings provided enough buoyancy to set some record highs.
Beginning with the short holiday week, the news cycle began to be unrelentingly negative as the reality of the outbreak in the U.S. was communicated by the World Health Organization (WHO) and the Centers for Disease Control (CDC). The S&P 500 headed into correction territory (a decline of 10% or more). The seven-day decline of 13% from the all-time high notched on Wednesday, February 19th marked the fastest correction on record.
All eleven sectors of the S&P 500 (the S&P organizes all public companies into industry groups) experienced losses of at least 9%, with more than half declining more than the overall market. It was a complete rout, with very little dispersion between growth, value, cyclical, and defensive.
The resultant flight to quality led to the Bloomberg Barclays U.S. Treasury Index posting total return of 2.56%. The Bloomberg Barclays U.S. Aggregate Bond Index returned 1.80%. The Bloomberg Barclays U.S. High Yield Index was down -1.41%, due in part to the greater correlation of high yield bonds with equities.
The flip side of the positive performance story is the precipitous drop in yields – and what that bodes for the overall economy. The 10-year U.S. Treasury fell 40 bps in February to a record low of 1.12%, as investors registered concerns that the ongoing pandemic would at best dampen growth and at worst lead to recession. Investors priced in the likelihood that the Federal Reserve would ride to the rescue with an interest rate cut to compensate for the effects of the coronavirus. And they did – with an emergency cut of 50 bps on March 3, the first emergency cut since the crisis of 2008.
At this point (March 9th), the yield curve remains inverted. Ten-year U.S. Treasury yields have broken below 1.00% for the first time ever and are hovering there. The market is expecting further cuts on or before the regularly scheduled Fed meeting on March 18th, and at least two further cuts before year end.
