as of March 30, 2020
The global economy experienced an unprecedented halt in activity in March, as social distancing policies have forced many businesses to temporarily close. The global economy is almost certainly in a recession, although estimates for its magnitude and duration vary widely. The initial impact on the US labor market has been dramatic, with nearly 10 million initial jobless claims registered during the last two weeks of March alone. The fiscal and monetary response has been swift in hopes of reducing damage and preparing the economy to rebound once the virus has been contained.
In early March, the Fed made an emergency 50 basis point rate cut to a range of 1-1.25%. Later in the month, as liquidity problems were mounting, the Fed cut rates by an additional 100 basis points, effectively bringing its policy rate to zero. The Fed also announced unlimited quantitative easing, and revived several programs from the financial crisis designed to provide liquidity to investment-grade corporate, mortgage, and municipal bond markets.
Global equities experienced steep declines in Q1, with the MSCI ACWI Index falling 21.4% as the world struggled to project the impacts of COVID-19. The S&P 500 declined 19.6% during the quarter, but outperformed most other markets. Over the past year, the S&P 500 has declined 7.0%. International developed stocks declined 22.8% during the quarter and 14.4% for the trailing 1-year period. A stronger dollar hurt US investors during the quarter. Emerging market equities declined 23.6% in Q1. Asian emerging markets dramatically outperformed their peers given that they are generally further along in their experience with the virus.
Within fixed income, the Bloomberg Barclays Aggregate Index returned 3.1% during the first quarter as strong gains for Treasuries more than offset losses in credit. The yield curve shifted downward during the quarter as 3-month yields fell 144 bps to 0.11%, while the 10-year yield fell 122 basis points to 0.7%. Investment-grade corporate bond spreads rose an average of 179 basis points during the quarter to 2.7%, which is 160 basis points above the long-term median level.
The sudden stop in the global economy is unprecedented, and it is difficult to predict how it will play out. The economy should begin to recover once lockdowns are relaxed, but uncertainty could persist until there is a vaccine or an effective treatment. Businesses could be less likely to invest, impacting future productivity and employment growth. Households may also be hesitant to resume normal activity, and could look to increase savings and reduce debt.
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