HIGHLIGHTS:
Double Whammy
The Positives
Our Current Outlook
Double Whammy:
Coronavirus fears continued to push stock prices lower, despite policy actions designed to support the economy and battle the contagion. The human toll from COVID-19 is significant and tragic. Reported cases now exceed 100,000 and deaths are nearly 4,000. The battle to contain the virus is intense, as governments employ modern science and lessons learned from past epidemics. We believe these efforts will ultimately prove successful. For those who have an interest in learning more about the history of fighting contagious viruses, “The Great Influenza” by John M. Barry is an informative read.
In addition to the coronavirus, oil prices, which were already weak due to slowing global growth, fell further in response to a decision by Saudi Arabia to ramp up oil production after failing to come to an agreement with Russia on production cuts. Lower oil prices are a positive for consumers, because they act like a tax cut. However, with the U.S. now essentially energy independent, the drop in prices will weigh heavily on the debt-intensive energy sector.
The uncertainty and fear related to these events is understandable. From an investing perspective, our baseline scenario for the economy and the markets is cautiously positive. We are likely to see slower global economic growth near term, particularly in China, but we believe the underlying strength in the U.S. economy can weather what will likely be a limited term strain.
The Positives:
On the positive side, policymakers have already taken action to combat the effects of the virus. First, the Federal Reserve cut the overnight fed funds rate by ½% and is expected to reduce short term rates again at this month’s Federal Open Market Committee (FOMC) meeting. These actions should help keep lending markets functioning normally.
In addition, Congress overcame extreme partisanship to pass an $8.3 billion virus package aimed at adding needed resources to battle the contagion. Other stimulus measures are also being discussed.
On the economic front, job creation easily beat expectations in February, and the unemployment rate fell back down to a 50-year low of 3.5%. While we expect job growth to slow noticeably over the coming months, the already tight labor market, steady income growth and high saving rate, combined with low inventories could limit the downside risks to the record expansion. The latest reading from the Atlanta Fed’s GDPNow model shows the economy growing at a healthy 3.1% annual rate.
One sector of the economy that appears to be benefiting from the fear and uncertainty that has pushed down interest rates is the housing market. Mortgage rates have fallen to record lows, which not only makes home purchases more affordable, it has sparked a wave of mortgage refinancing, which boosts disposable income.
Our Current Outlook:
Few projected a global pandemic as a major market driver in 2020, but we believe the markets can make it through this period of uncertainty, albeit with some scars. We expect equities to remain volatile and vulnerable over the near term while policymakers work to contain the virus. However, as signs emerge that government actions and science begin gaining the upper hand, the markets could recover as early as this summer. If so, interest rates could be higher by the end of the year.