The COVID-19 outbreak (coronavirus) roiled markets over the past two weeks, putting the S&P 500 into correction territory and near a 20% bear market decline. Though new cases in China slowed during the month, data out of China pointed to economic contraction and economic forecasts in the United States began to fall as new cases emerged in the United States and globally as containment efforts intensified.
- The ongoing market correction may present an attractive medium-to-long term opportunity and our year-end 2020 fair value S&P 500 Index target of 3,250-3,000 may still be attainable*. However, given the uncertainty, our economic, earnings, and market forecasts are currently under review.
- We favor large cap stocks over small and a balance of growth and value equity styles where suitable.
- Attractive valuations and solid economic growth may favor emerging markets over foreign developed markets. Slowing new cases in China has helped buoy emerging market stocks in recent weeks.
- The emergency 50 basis point (.5%) rate cut by the Federal Reserve (Fed) March 3 in response to the risks to U.S. growth from the outbreak did little to stop cascading yields at all-time record lows.
- We favor a blend of high-quality intermediate bonds with a modest underweight to U.S. Treasuries and still see value in mortgage-backed securities (MBS) relative to Treasuries, but we have downgraded our view to neutral due to the potential impact of refinancing as mortgage rates fall.
- U.S. stocks corrected sharply in recent weeks, leaving markets oversold on various metrics. Bottoming can be a slow process, but sentiment reveals signs of extreme fear often associated with market lows.
- Key changes from February’s report: Upgraded healthcare view from neutral to positive; downgraded industrial metals view to neutral from positive; downgraded MBS from positive to neutral.
Our Asset Class & Sector Choices
Economy: Pre-Outbreak Momentum Evident in U.S. Data
February data reflected some evidence of COVID-19 impact but generally held up well in the United States. That picture will likely change, however, when March data is reported. Globally, it was a different story, with first quarter data pointing to economic contraction in China, the epicenter of the outbreak.
- Conference Board’s Leading Economic Index (LEI) rose 0.9% year over year in January. The strong bounce in the LEI after a string of lethargic readings signaled continued economic growth.
- Payrolls and Labor. Nonfarm payrolls increased 273,000 in February, well above expectations for a gain of 175,000. The gain, which is sufficient to maintain the current low unemployment rate, was above the 12-month average of 201,000. Wages rose 3% year over year in January, in line with recent trends.
- Inflation. The core Consumer Price Index (CPI), which excludes food and energy prices, increased 2.3% year over year, in line with the recent trend and not high enough to worry the Fed.
On the wholesale side, the core Producer Price Index (PPI), excluding food and energy increased 1.5% year over year in January.
Prices for core personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, increased a softer-than-expected 1.6% year over year in January, well within the Fed’s 2% target.
- U.S. manufacturing slowed in February as the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) edged lower to a marginally expansionary 50.1. Supplier delivery times lengthened due to China’s measures to contain the COVID-19 outbreak.
- U.S. Consumer. The Conference Board’s Consumer Confidence Index rose slightly in February and remained elevated despite increasing fears of a U.S. COVID-19 outbreak. Recent sales data reflected a 0.3% increase in January, in line with expectations. The retail sales component within gross domestic product (GDP) was unchanged after a 0.5% increase in December.
- U.S. Business Investment. Bookings for all durable goods dipped 0.2% month over month in January and fell 2.3% year over year. However, excluding volatile transportation orders, capital goods orders rose a solid 0.9% month over month and were flat year over year, reflecting continued sluggish capital investment from corporate America.
- Federal Reserve. The Fed announced an emergency 50 basis point (0.5%) rate cut March 3, the first intra-meeting cut since 2008, amid concerns about a widening COVID-19 outbreak. Even after the announcement, which failed to buoy market sentiment, the bond market was pricing in additional rate cuts at the Fed’s March 17–18 policy meeting.
2020 Real GDP Growth Forecasts
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