The U.S. economy came to a halt as the coronavirus (COVID-19) pandemic caused the sudden and historic shutdown of most aspects of the domestic economy. GDP is forecasted to drop substantially over the next two quarters as the U.S. heads into a potentially severe recession.
The March unemployment rate rose to 4.4%; the Bureau of Labor Statistics used the week ending March 12 as its reference period, thus failing to capture the full damage of the outbreak in their March figure. The number of Americans seeking unemployment benefits continued to surge to record levels; 22 million new unemployment applications were made over the four-week period ending April 11, with large parts of the U.S. sheltering in place. The unemployed came from almost all sectors of the economy, from leisure and retail to construction and manufacturing. The scale and speed of the layoffs are without precedent.
With the labor market coming to a halt, consumer spending is expected to fade rapidly. Retail sales plunged 8.7% in March, the biggest decline since the government started tracking the series in 1992. Industrial production fell 5.4% in March, the steepest decline since 1946. In late March, Congress approved the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the largest economic rescue package in the history of the U.S. The stimulus package of about $2.2 trillion is intended to dampen the economic fall-out from the pandemic, providing financial assistance to individuals and businesses. The CARES Act greatly exceeds the financial packages Congress previously enacted to address the 2008 financial crisis. It includes approximately $2 trillion in assistance to individuals and businesses with additional funds authorized for direct loans and guarantees to support its lending facilities and funds for direct lending to passenger and cargo air carriers. An additional $367 billion is available to assist small businesses through the Small Business Administration (SBA). The CARES Act also contains a number of provisions aimed at granting temporary regulatory relief. Despite the enormity of the assistance provided by the CARES Act, additional financial assistance legislation is expected if the duration of the national emergency extends beyond a short period of time.
The Federal Reserve announced two emergency rate cuts in March. The second cut on March 15 dropped the benchmark rate to near zero as the Fed launched a massive $700 billion quantitative easing program to support the economy. Days later, the Fed expanded its rescue plans by announcing unlimited bond-buying, three new credit facilities, and an upcoming Main Street lending program. This unprecedented monetary stimulus is aimed at preventing this health crisis from turning into a full-blown financial crisis. Then on April 9, the Fed took additional actions to provide up to $2.3 trillion in loans to support the economy.
Treasury yields fell sharply during the quarter, experiencing an extraordinarily quick and dramatic reduction. The 3-month Treasury bill yield ended the quarter at 0.11%, while the 10- and 30-year Treasury bond yields landed at 0.70% and 1.35%, respectively. A flight to quality caused investors to purchase Treasuries (safe-haven assets) as fear in the marketplace escalated.
The corporate fixed income sector has been in a state of turmoil as corporate bond spreads have widened substantially, trading at their widest credit spreads since the 2008 Financial Crisis. This is a sign that investors expect corporate default rates to rise. The securitized sector was volatile as well and the mortgage markets have seen record selling. CMBS deals experienced liquidity and fundamental concerns about property values and near-term lease payments. High yield bonds dropped 12.6% for the quarter; the Bloomberg Barclays U.S. Aggregate Bond Index improved 3.2% since Treasury securities represent over 40% of the index.
The longest-running bull market in history ended days after its 11-year anniversary in mid-March. The S&P 500 fell by 19.6% for the quarter - its worst quarterly decline since 2008, as all sectors reported losses. The index fell over 30% on a peak-to-trough basis. The energy sector took the worst beating, dropping 50.5% in the quarter. The financial sector fell 31.9%. Technology, consumer staples, and utilities declined the least, down 11.9%, 12.7%, and 12.7%, respectively. Growth stocks continued to dominate value by a wide margin as large-cap growth outperformed both small- and mid-cap growth considerably. The VIX (also known as the Volatility Index) surged in March, setting a record on March 16 at a record high of 82.69, surpassing the peak level of 80.74 set on Nov. 21, 2008.
The pandemic did not spare international markets. International stocks of both developed and emerging market (EM) countries fell approximately 3% more than the S&P 500 during the quarter, with EM falling slightly more than developed countries. Within the three EM regions, Latin America saw the largest drop (46%), while EM Asia saw the smallest drop (18%). EM Europe, Middle East, and Africa declined 34%. Stocks in China, where the virus hit first, fared relatively well with only an 11% drop in dollar terms while other EM countries were devastated as their primary commodity markets and currencies have also collapsed. Brazil plunged 50%. A global recession is appearing inevitable as global economies have come to a standstill. The big question is whether it will be a sharp but short recession or a more sustained economic downturn.
The Bloomberg Commodity Index declined 24% in Q1, mainly caused by the sharp drop in oil prices, which makes up about 30% of the index. Oil prices collapsed by 66% during the quarter to $20.48 per barrel, an 18-year low, caused by demand declines and the oil price war between Saudi Arabia and Russia, as the two countries undercut each other with their oil production and pricing decisions. The sharp decline in oil prices was a primary driver for the energy sector being the worst stock sector during the broad market sell-off. Gold prices rose modestly. Real estate was the second-worst performing asset class, declining 27.2%.
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