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As a result of the current national emergency situation, Allegiant’s office is closed for now and all employees are working from home. We will keep 100% functionality throughout this crisis, as will our partners Commonwealth Financial Network and National Financial Services (Fidelity). Phone lines will be open and calls will be answered, and all our systems are accessible from wherever we are. While we anticipate some bumps in the road, I want every client to feel confident that we will remain 100% at work for you.

The U.S. Federal Reserve took additional emergency measures to improve financial conditions on March 15th. For the second time in two weeks, the Fed announced an inter-meeting interest rate cut, this time dropping the Federal Funds Rate to zero. In a new measure, the Fed will also allow banks to borrow for up to 90 days, instead of the normal overnight loan. This should provide banks with ample liquidity to meet their day-to-day operations.

With rates at zero, the Fed has now exhausted its most effective policy tool, but don’t rule out negative interest rates over the coming months. In addition, there are other options at the Fed’s disposal to provide more stimulus to the economy.

As I’ve mentioned in the past, the U.S. Federal Reserve is in an envious position compared to other global central banks. Entering this economic slowdown, the Fed had raised interest rates to 1.5%, while other central banks were still zero-bound. This provided the Fed with more ammunition to fight a slowdown. Jerome Powell, the chairman of the Federal Reserve, recently messaged that the Federal Reserve is prepared to use all the tools at its disposal to protect the economy from the impact of the coronavirus pandemic.

The Return of VolatilityIn a Big Way 3 12 20

For much of the current economic expansion the stock market has had limited volatility. When it has appeared, it has been short-lived. The chart above displays the S&P 500 index along with the VIX Index, which acts as a proxy for market volatility. In the last ten years, stocks have steadily moved higher, while the VIX has had very few spikes. Volatility has come back with a vengeance in the last several weeks and does not look like it is going away in the immediate term. Investors must remember that short-term volatility is necessary in order to achieve long-term gains. 

As the coronavirus outbreak sweeps across the globe, we expect economic activity over the coming months to weaken. While I’m not an epidemiologist, many signs point to the virus spreading further before it is contained. It’s too early to tell how much of an economic impact the virus will have, but it is potentially the negative shock that we have been planning for. To add insult to injury, the development on Sunday (3/8/2020) that the oil market is now in a full-blown price war could be a second negative shock to the system.

The first COVID-19 coronavirus case was identified in late December 2019 in Wuhan, China. Over the past two months the virus has wreaked havoc on China. While 89%[1] of all identified cases are within China’s borders, cases have been identified in 72[2] countries. Do you know which major country had the best equity market performance over the prior month? Hint: It may surprise you.

On March 3rd the U.S. Federal Reserve issued an emergency inter-meeting half-point rate cut. As I wrote in my March commentary, the market was increasingly pricing in a Fed Funds rate cut. The question was not if, but when and more importantly, how much. The Fed wasted no time trying to catch up to market forces. Long-term interest rates, which are controlled by the markets and not the Fed, were moving lower and the Fed was forced to respond. Unfortunately, this is not exactly how I would have liked it to play out, as I believe it diminished some of the benefit of the rate cut. Being reactive is usually not as good as being proactive.

EV9 7899 2000 Bull Above Bear

After brushing off most of the initial coronavirus news, global equity markets finally reacted in force during the last week of February. While many of the early moves China made to contain the virus bought other countries time, it is becoming evident that most, if not all, countries around the world will have to deal with the coronavirus on their soil. To what extent, we don’t know, but the impact will be global. With U.S. equity markets down more than 10% from the peak, could this be our first bear market (a decline of 20%+) since the global financial crisis of 2008?

Chart The Death of Breadth

The S&P 500 posted very strong returns in 2019. However, sometimes averages can be deceiving. Diving deeper, a significant portion of the return was driven by very few stocks. Strong performance by the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), along with a few other mega cap companies, lifted the average higher as the majority of U.S. stocks did not perform nearly as well.

As indicated by the top panel in the chart above, returns of the S&P 500 (gold line) have significantly outperformed the equal-weighted S&P 500 returns (black line) over the past few years. This means market breadth has decreased and more return has come from only a handful of the largest companies in the index. 

The small list of disruptor companies are increasingly dominating market cap weighted stock indices. In fact, only 10 stocks account for nearly 25% of the S&P 500. 2019 was a great year for these stocks, but any stumble going forward could have a significant impact on market returns.

EV9 7826 1200 LukeatBloombergTerminal

  • Heading into 2020, Allegiant expected U.S. economic growth to slow. While weak manufacturing was the root cause, now American businesses are dealing with adverse impacts from the coronavirus outbreak. 
  • To date, the coronavirus outbreak is mostly a China story. However, the likelihood of the virus spreading throughout the world has increased.
  • Global supply chains are feeling the pain. Businesses are shutting down production; inventories are declining; and now service businesses are also feeling the impact.
  • Even if only temporary, the economic shock from the coronavirus outbreak could push the U.S. economy into a technical recession. 

The Allegiant Investment Research team expected U.S. economic growth to slow in 2020. Grappled with a weak manufacturing sector, the economy was poised to run slightly above stall speed. As such, the odds are higher that a negative trigger event could push the economy into recession. Could the coronavirus outbreak be that trigger event?