The story of a quarter rocked by a global pandemic

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — April 2, 2019

The MSCI All Country World index of global equities fell 22 percent in the first quarter. It was the steepest quarterly decline since the end of 2008, in the midst of the financial crisis. The S&P 500® index fell 20 percent, also its worst decline since the end of 2008. The energy sector suffered the sharpest decline, falling 52 percent as the price of WTI crude oil fell 66 percent in the quarter. Financial stocks were a close second, falling 32 percent. The yield on the ten-year U.S. Treasury note fell from 1.92 to 0.67 percent. 

As the spread of the coronavirus gathered momentum throughout the quarter, so too did estimates of its economic impact. In response, the Federal Reserve lowered the overnight interest rate to zero, launched a number of lending facilities, and Congress passed a $2 trillion economic support bill. The second quarter is expected to absorb the brunt of the health and economic effects of the virus, particularly during its first half, as now more than three-quarters of the U.S. population is subject to stay-at-home directives, and 180 countries and regions around the globe have been affected. We expect to see a significant decline in economic activity and a significant rise in unemployment during the quarter. 

Swift actions by lawmakers and global central banks have been impressive 

In a modest sign of progress, the director of the National Institute of Allergy and Infectious Diseases said this week that he is starting to see “glimmers” in the data that social distancing may be slowing the spread of the virus, while simultaneously warning that the situation remains very dangerous. And the response from Washington in the effort to mitigate the economic impact has so far been impressive, both in terms of its size and speed. And there is talk about what more might need to be done as the economy transitions from stabilization to sustainable growth. The fiscal response overseas among the G20 countries has been impressive as well, amounting to an estimated 6 percent of annual global GDP in total. And major foreign central banks have announced sizeable stimulus programs as well. 

As weak as equity markets were in the first quarter, they did manage to mount a rally at quarter-end that lifted stocks 15 percent off their low. However, history tells us that recoveries from bear markets are typically a process that entails periods of advance and retreat. Oftentimes, the major averages revisit their prior lows after enjoying recovery rallies that prove to be unsustainable. Whether stocks will follow that pattern this time around remains to be seen. It should be noted that stocks have experienced weakness for the second straight day on Wednesday, the first day of trading of the second quarter. And volatility has edged higher. But stocks do eventually recover, although it takes time. 

U.S. jobless claims reach another record high 

The U.S. unemployment rate is expected to rise modestly when the March payroll report is released on Friday. But the anticipated rise to 3.8 percent on an expected loss of 100,000 jobs will be completely overlooked as being out of date, given the timing of when the data is compiled during the month, during the week of the 12th. 

The weekly jobless claims number has taken on far more significance, given its timeliness. This week’s total of 6.6 million follows last week’s 3.3 million. Together they imply a rise in the unemployment rate of 6 percent. And it is expected to go higher as the full effects of the economic slowdown are reflected in the monthly data in April and May.