February 2020 Market Commentary: COVID-19 (Coronavirus) and the Economic Quarantine
Data Source: Bloomberg
February 2020 Highlights:
- Global stocks posted negative returns (MSCI All-Country World Index or ACWI down 8.1%), as developed markets bore the brunt of this month’s sell-off. Asia-Pacific ex Japan and Emerging Markets (-4.2% and -5.3%, respectively) held up relative to the U.S., Europe, and Japan (down 8.2%, 9.1%, and 9.3%, respectively), as developed markets played ‘catch-down’ to EM’s weakness in January.
- Already weakened in January following initial concerns over the coronavirus outbreak, the sell-off spilled over into the U.S. and Europe following reports of a significant outbreak in northern Italy, a key industrial region for continental Europe.
- Within the U.S. markets, U.S. small caps underperformed large caps and value underperformed growth by a sizeable margin, increasing its year-to-date underperformance, as financials and cyclicals sold off over dropping interest rates and dissipating global demand. S&P Small Cap returned -9.6% vs. -8.2% for the S&P 500 while S&P Pure Value returned -13.0% vs. -6.9% for Pure Growth?
- Communication Services, Real Estate, and Healthcare led major sectors while Financials and Energy lagged due to the drop in interest rates and energy demand. Defensive sectors such as utilities did not benefit as much from the drop in interest rates.
- Among factors, Momentum and High Quality outperformed Minimum Volatility, Value and High Dividend. Momentum is capturing the high growth and quality segments of the market both of which have outperformed over the past year. Surprising that minimum volatility did not perform as well versus the other factors, given the defensive nature of the factor.
- Fixed income posted a solid month as the 10-Year Treasury Yield settled at 1.15% (down from 1.91% at the beginning of January). The U.S. Bloomberg/Barclays Aggregate Index returned 1.8% for the month, outperforming other major fixed income segments. High yield and emerging market debt suffered with the sell-off in risk assets.
- Commodities continued their sell-off from January returning -8.4% for the month as oil prices and industrial metals saw steep declines. Real estate did not benefit as much from the drop in interest rates. Precious Metals gave back its mid-month gains to end down 1.9% for the month, but the asset class continues to ‘shine’ as a safe haven.
- February’s global market decline did take a bite out of forward valuations, especially the S&P 500 which saw almost 2.5 points taken off the 12-month forward price/earnings multiple, which had peaked at 19x before dropping to 16.6x at month-end. It’s challenging to see a scenario where S&P valuations approach 19x again unless a significant earnings recovery from the coronavirus materializes in the near future.
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By: Benjamin Lavine