03/23/2020
The selloff in equities accelerated last week. The S&P 500® index fell 15 percent, its worst week since 2008, leaving the index down 32 percent from its February 19 high, and down 29 percent on the year. At the sector level, real estate was far and away the worst performer. Also, notably weak were energy, industrial and financials. All eleven sectors were lower, with the best performer, consumer staples, still falling by 11 percent. For the week, The Chicago Board Options Exchange VIX index averaged 72. Treasury bond yields were lower on the week, as bond market volatility remained elevated.  The ten-year yield fell 11 basis points to 0.85 percent, and the thirty-year bond yield fell 12 to 1.42 percent. High yield credit spreads widened sharply once again, rising 278 basis points to 1009. It was the fifth straight week of wider spreads that have climbed 653 basis points in that time, to their widest since 2009. The municipal bond market also remained under extreme pressure as selling accelerated, particularly at the shorter end of the yield curve. 

The dollar surged higher as the demand for liquidity and safety remained unabated. The DXY dollar index gained 4 percent last week alone and is higher by 8 percent in the past two weeks. WTI crude oil fell $9.30 a barrel, or 29 percent. 

The Fed Acts Quickly to Improve Liquidity; Congress Looks to Bring $2 Trillion in Aid 

The Federal Reserve activated facilities to improve liquidity in the market for short-term corporate funding. As it did during the financial crisis, the Fed last week launched a lending facility to buy commercial paper, a market where spreads have widened sharply amid the surge in demand for credit. In a related move, it also launched a facility to provide loans to the 24 primary dealers to ensure their ability to finance their securities positions. It also launched a lending facility to ensure sufficient liquidity among money market mutual funds. 

All of these actions followed the Fed’s full one percent reduction in the overnight rate at the start of the week, and the launch of a program to buy bonds in the Treasury and mortgage-backed securities markets. Importantly, Congress is also working on a bill to provide reportedly $2 trillion in economic aid in response to the economic impact of the virus. The Senate is expected to vote on the bill on Monday, followed shortly after by the House, with enactment expected by mid-week. However, partisan negotiations were still underway late on Sunday. 

It is estimated that roughly one-fourth of the U.S. population is now subject to various stay-at-home directives in an effort to slow the spread of the virus, and the number of documented infections continues to rise sharply, with 30,000 now estimated as of Sunday, March 22. Worldwide, the number of infections is estimated to exceed 300,000.

Investors Prepare for More Bad News, But Things Will Get Better and We Will Persevere 

Increasingly, the flow of economic data is beginning to reflect the impact of the virus. Nowhere is that more likely than in this week’s report of new jobless claims on Thursday. Much was made of last week’s increase of 70,000 to a two-year high of 281,000. That will seem rather modest if this week’s Bloomberg consensus estimate of 1.5 million is even close to accurate. Also, on this week’s calendar are the March flash reports on manufacturing and service activity, with the former estimated to have slipped into contraction. February new home sales, durable goods orders, personal income and spending are also scheduled. 

It remains too early to say with any confidence that we have seen the bottom in stocks. Despite stock prices being down almost one-third from the peak, the economic impact of the virus remains too uncertain to quantify. Estimates of the expected decline in second quarter GDP are being revised lower and estimates of expected unemployment are being revised higher. And despite the central bank provision of a variety of funding programs, liquidity remains at a premium, causing persistent pricing distortions. In the weeks immediately ahead, the news on both the healthcare front and economic front is certain to get worse. We should be prepared for that. And orders to remain at home will undoubtedly become increasingly tiresome. 

Eventually, however, things will get better. The spread of the virus will eventually begin to level off. Slowly the economy will come back to life. And stock and bond markets should begin to return to normal. No one can say with certainty how long this will take. But with perseverance, we will get through this. 
   
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Individual securities referenced are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. 

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The S&P 500 Real Estate Index comprises stocks included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS)® real estate sector. 

The S&P 500 Industrials Select Sector Index measures the performance of industrial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Financial Select Sector Index measures the performance of financial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The US 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. This is computed by using rates supplied by approximately 500 banks. 

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

West Texas Intermediate (WTI) crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.

The 30-Year Treasury is a U.S. Treasury debt obligation that has a maturity of 30 years. 

Past performance is not a guarantee of future results.

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