March 2020
A global recession in 2020 is all but confirmed as nations shut down economic activity to limit the spread of COVID-19. The virus is unique in that it is a demand shock and supply shock, and also a negative wealth, oil price, and credit shock. There will be a wide range of subsequent effects. We are monitoring these developments and have updated our previous Stagnation followed by Recession outlook for the U.S. economy to reflect a Recession in March, extending through to the end of the year, as the situation will deteriorate further before beginning to recover.
There is evidence that the disease has likely peaked in China. The Bloomberg China Economic Recovery Index shows that 70% of economic activity was restored by March 9th, up from just 27% at the beginning of February.1 A coordinated global response has started to emerge. Based on the experience in China, virus incidents are unlikely to peak in Europe and the U.S. until June.
The Russia-Saudi spat that has resulted in the current global oil glut and the expected decline in demand due to this pandemic will keep oil prices low with mixed effect across economies. It will have a negative impact on oil-exporting emerging markets outside Asia, while also affecting oil-and-gas related capital expenditure in the U.S. Net oil importers in Europe and Asia will be beneficiaries although the stronger US dollar will offset a portion of the benefit.
In January, a record 31.8 million Americans were employed in retail trade, hotels and motels, air transportation, restaurants and other eating places, arts, entertainment and recreation, and offices of real estate agents & brokers.2 Many of these establishments have seen their businesses collapse in recent weeks and have reduced their payrolls significantly. As we enter the third week in March, 158 million Americans have been told to stay home from work and other activities.3 This doesn’t include the multiplier effects on other industries. Initial unemployment claims and the unemployment rate are soaring and will remain high through the second quarter.
Market behavior in recent weeks has broken records for the speed of its decline. It took only 16 trading sessions for the S&P 500 to fall 20% from its highs, the quickest descent into bear market territory on record.4 U.S. equities were battered in February, down 13% from their peak on February 19th. The S&P 500 was down 8.2%, while smaller caps lagged, with the S&P Midcap 400 and the S&P SmallCap 600 down 9.5% and 9.6%, respectively. The S&P/TSX Composite was down 5.9%.
Asian equities took part in the sell-off, with the S&P Pan Asia BMI closing the month with a decline of 6.6%. European equities struggled in the face of a broader global sell-off. The S&P Europe 350 dropped 8.6% on the month. U.K. equities continued to lag their European counterparts; the S&P United Kingdom declined 9.0% on the month, returning all of its gains from the past 12 months.
In March, we maintained the asset allocation positioning that we established on February 19th. This reflects our view on deflationary and recessionary influences that dominate the global economy. Allocation to equities was reduced in February to 12% in Tactical Conservative, 17% in Tactical Moderate Growth, 26% in Tactical Growth, and 34% in Tactical Aggressive Growth. In February, within the Fixed Income allocation, we added the 20+ year Treasury Bond. As of March 25th, the 10- year treasury yield has declined by 1.577% since the start of the year, rewarding this position. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.
Historically, central bank stimulus is bullish for bullion. In the early days of the selloff, safe haven assets such as gold and treasuries sold off when margin calls on equities and credit occurred as equity portfolio managers were sitting with record-low cash buffers. Gold provides diversification in a portfolio and is correlated with the stock market, becoming inversely correlated during periods of stress. In a world of historically low interest rates, gold is a safe-haven. Similar short-term movement was seen in the ten-year note and in State and Local government bonds and Mortgaged Back Securities guaranteed by the federal government in response to liquidity funding requirements.
The shape of the recovery from the pandemic and for the global economy are highly correlated. The second-order effects of schools closing, businesses closing due to staff absence, and a paralysis in consumer and corporate confidence will create challenges for commerce and credit markets. Policymakers will need to protect both supply and demand by providing ample liquidity to banks and corporations, in order to minimize the risk of default and job losses. The trend towards global populism and protectionism remains a risk to the recovery. We expect to see prolonged disinflation. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame , President and CIO
1Bloomberg. China Economic Recovery Index. March 9, 2020.
2Trading Economics, United States Employed Persons. January 2020.
3New York Times, World Coronavirus Updates. March 23, 2020.
4Financial Times. “S&P 500 suffers its quickest fall into bear market on record”. March 13, 2020.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2020. Index performance is based on total returns and expressed in the local currency of the index.
