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Market Commentary: Week of March 2, 2020


market-commentary-week-of-march-2-bodyWhat Happened:

If it were a fight, they would have stopped it on Wednesday. The virus COVID-19 was all that mattered this past week as stocks were routed the most since the Financial Crisis, while multiple Fed rate cuts were priced in from, maybe 1 at the beginning of the week to probably 3 when the closing bell rang on Friday afternoon. Any asset that wasn’t a US Treasury note was for sale. The high-yield bond and loan market froze up. Liquidity is like oxygen, you only notice it when it is not there.

  • The S&P 500 was down 11.5% for the week

  • The NASDQ was down 10.5% for the week

  • The 2-year Treasury note dropped 54 basis points, closing at .81%

  • The 10-year Treasury note dropped 38 basis points to close at an all-time low in yield of 1.09%

  • VIX index increased 135%, closing at 40.11, a new high for the year

  • MOVE index increased 47%, closing at 109, a new yearly high

  • 5-year Investment Grade Corporate Spreads (as measured by Markit CDX) widened 20 basis points to 66.4 (high over last year 70.18, low over last year 43.75) while 5-year High-Yield Corporate Bonds widened 75 basis points to 369.6 for a new yearly high

  • US Dollar Index closed down 1% at 98.13 (high year-over-year 99.86, low year-over-year, 95.76)

  • WTI Crude closed down 19% at 44.76, a new year-over-year low

What’s Going to Happen:

Fed Chairman Powell issued a statement Friday that the Fed stands ready with all its tools should there be a need to protect the economy. Unfortunately, COVID-19 is an external shock that really can’t be countered with monetary policy. However, as we stated in our latest article on Friday, “Vulnerable,” we believe that the Fed will deliver 50 basis points of rate cuts at either the March 18, 2020 meeting, or a combination of a 25 basis point inter-meeting cut and another at the March FOMC meeting. The news on COVID-19 over the weekend continues to unsettle as the virus has begun to spread in the US. Stocks may get some temporary relief from soothing Fed speak or actual action, but on a longer time horizon global economic contraction is pretty inevitable. Economic data this coming week:

  • Monday - ISM Manufacturing

  • Thursday - Productivity, Unit Labor Cost, Factory Orders, and Durable Goods

  • Friday - February employment figures

If the Friday employment data is positive, that might hold the risk markets up a bit, but truth is, nobody is looking in the rear-view mirror these days. It’s all about what is going to happen a week, a month, or a year down the road as the world battles COVID-19.


Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

  • The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.

  • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

  • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

  • The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.

  • The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.

  • The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.

  • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.

  • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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