US Month in Markets - January 2020

Market Summary

Index Returns - January 2020

Economic Surprise

The index measures economic data relative to expectations. A positive number indicates that economic data has outperformed expectations

Key News and Events

  • Escalating concerns over a coronavirus outbreak in China put pressure on equity markets in January. Equities continued their previous uptrend in the first half of the month, benefiting from market-friendly trade developments. After reaching new record highs mid-January, equity markets reversed its year-to-date gains as investors begin to assess the potential impacts of coronavirus on global growth.
  • The World Health Organization (WHO) declared the coronavirus outbreak an international emergency as the extent of the outbreak became apparent. Confirmed cases of the disease were initially limited to below 100 cases in Wuhan, China, but rose rapidly in the last week of January to over 10,000 across multiple countries. The number of confirmed cases now exceeds that of the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak, but the fatality rate remains relatively low at around 2% compared to 10% for SARS. Chinese authorities quarantined multiple cities, implemented travel restrictions and extended the Lunar New Year holidays in a bid to contain the virus. The U.S. State Department warned against all travel to mainland China, whilst the UK, Canada and many others issued “all but essential” travel warnings.
  • The U.S. and China signed a “phase one” trade deal on January 15 to pause the trade war. Under the agreement, U.S. tariffs on $120bn worth of Chinese imports were halved to 7.5%, whilst previously scheduled U.S. tariffs on the remaining untaxed Chinese imports were suspended. In return, China pledged to increase purchases of U.S. agricultural products and enhance intellectual property protection. The deal leaves the bulk of the U.S. and Chinese tariffs implemented over the past two years in place and did not address other U.S. priorities such as cybersecurity and market access issues.
  • In other trade news, U.S. ratification of the U.S.-Mexico-Canada Agreement (USMCA) was completed after President Trump signed the ratification bill into law. Meanwhile, the Trump administration postponed proposed tariff on French goods after President Macron agreed to suspend a new digital services tax pending discussions on a global framework. However, the U.S. government threathened retaliatory tariffs if the British government press ahead with a planned internet tax in April.
  • The oil price briefly spiked at the start of January amidst escalating tensions in the Middle East. After General Soleimani, a top Iranian military commander, was killed by a U.S. airstrike in Baghdad, Iran threatened “tough revenge” following the incident. However, concerns about an all-out U.S.-Iran war faded after an Iranian attack on U.S. forces resulted in no fatalities. Fears about the impact of coronavirus on China, the world’s largest oil importer, caused oil prices to slump later in the month.
  • The UK and the European Union (EU) completed ratification of the Brexit Withdrawal Agreement, enabling the UK to exit the EU on 31 January 2020. The UK will enter into an 11-month transition period, where the UK will retain the privileges and obligations of EU membership whilst both sides negotiate a future trade relationship. The ratification bill ruled out any extension to the transition period, despite skepticism from European Commission President von der Leyen that a comprehensive trade agreement can be finalized in such a short time period.

Market Highlights

Equities

  • Global equity markets fell over the month. Concerns about the impact of the coronavirus outbreak reversed previous gains driven by the finalization of the “phase one” U.S.-China trade deal.
  • The S&P 500 index was unchanged over the month, outperforming the MSCI World index, which fell by 0.6%. On a one-year basis, S&P 500 index outperformed the MSCI World index (21.7% vs 18.4%).
  • U.S. Small Cap stocks underperformed Large Cap over the month, as the Russell 2000 index fell by 3.2%. Small Cap’s underperformance was also observed on 12-month rolling basis, with the S&P 500 index significantly outperforming the Russell 2000 index (21.7% vs 9.2%).
  • Growth stocks outperformed Value stocks over the month as measured by the MSCI USA Growth and Value index. Growth Stocks rose by 2.9% while Value Stocks fell by 2.5% over the month. On a 12-month rolling basis, Growth Stocks outperformed Value Stocks (29.6% vs 14.4%).

Bonds

  • Yields tumbled over January as economic concerns raised by the coronavirus outbreak increased demand for safe-haven assets. The 10-year U.S. treasury yield fell below its 3-month counterpart. This part of the yield curve, which the Federal Reserve uses as one signal of a potential recession, inverted for the first time since October.
  • The 10-year U.S. treasury yield fell by 40bps to 1.52% and 30-year U.S. treasury yield fell by 38bps to 2.01% over the month. Meanwhile, the 20-year TIPS yield fell by 30bps to 0.09% and 20-year breakeven inflation fell by 12bps to 1.74% over the month.
  • Corporate bonds delivered a positive return as rising credit spreads was counteracted by a fall in the underlying risk-free yields. The spreads on the Bank of America Merrill Lynch U.S. Corporate Index rose by 8bps to 109bps and the spreads on the Bloomberg Barclays Long Credit Index rose by 12bps to 151bps over the month.
  • The U.S. High Yield bond spread over U.S. treasury yields rose by 43bps to 403bps and the spread of USD denominated EM debt over U.S. treasury yields rose by 26bps to 323bps over the month.

Commodities

  • The S&P GSCI index fell by 10.8% in USD terms over the month.
  • The S&P GSCI Energy index fell by 15.0% as the price of WTI crude oil fell by 15.6% to US$52/BBL. The oil price tumbled on coronavirus fears. China is the world’s largest importer of crude oil, and with the quarantined city of Wuhan home to major car manufacturing facilities, a significant reduction in oil demand is anticipated.
  • Industrial Metal prices fell by 7.1% as copper prices fell by 9.5% to US$5,570/MT.
  • Agricultural prices fell by 2.7% and gold prices rose by 4.6% to US$1,584/Oz.

Currencies

  • The U.S. dollar appreciated against most major currencies (except the Japanese yen) over the month.
  • Sterling depreciated by 0.5% against the U.S. dollar over the month, ending the month at $1.32/£. The euro depreciated by 1.3% against the U.S. dollar over the month, ending the month at $1.11/€.
  • The Japanese yen appreciated by 0.3% against the U.S. dollar over the month, ending the month at ¥108.39/$ whilst the Canadian dollar depreciated by 2.0% against the U.S. dollar over the month, ending the month at C$1.32/$.

Highlighted Economic Release

Eurozone GDP Growth (January 31)
The Eurozone economy inched up by 0.1% in Q4 2019, recording the weakest growth rate in almost seven years. The French and Italian economy unexpectedly contracted, declining by 0.1% and 0.3% respectively over the quarter. Meanwhile, the bloc’s unemployment rate dropped to 7.4%, an 11 year low.

U.S. GDP Growth (January 30)
The U.S. economy grew by an annualized rate of 2.1% in Q4 2019, matching the previous quarter’s growth rate. The annual growth rate of 2.3% over 2019 was the slowest since 2016. Consumer spending slowed sharply over the quarter, whilst increases in net trade flows caused by falling imports contributed to growth.

Bank of England Base Rate (January 30)
The Bank of England (BoE) kept interest rates on hold at 0.75% in Mark Carney’s last meeting as BoE governor. Markets were pricing in a roughly 50% chance of a 25bps rate cut, but the BoE decided against a rate cut amidst rebounding economic data after December’s general election.

Federal Open Market Committee (FOMC) Rate Decision (January 29)
The Federal Reserve kept interest rates on hold at 1.50% to 1.75% at their latest meeting. However, the Fed voted to increase the Interest on Excess Reserves by 5bps to 1.60% in a bid to move the Fed Funds rate toward the center of the range.

Markit U.S. Manufacturing PMI (January 24)
The U.S. Manufacturing PMI fell by 0.7 points to 51.7, underperforming market expectations of a 0.1-point rise. It pointed to the slowest manufacturing growth in three months as domestic and foreign client demand softened.

U.S. University of Michigan Consumer Sentiment (January 17)
Consumer sentiment in the US slipped by 0.2 points to 99.1 in January, down from the seven-month high recorded last month but remained at elevated levels. Consumers revised down their outlooks for future economic growth but improved their estimates for the current economic conditions.

China GDP Growth (January 17)
The Chinese economy grew by 6.1% last year, down from 6.6% in 2018, recording the weakest expansion since 1990. However, it remained within the government’s target range of 6.0% to 6.5%. Industrial production increased by 5.7% over 2019, whilst retail sales increased by 8.0%.

U.S. Nonfarm Payrolls (January 10)
145,000 jobs were added to the US economy over December, the lowest monthly job gains in seven months and down from job gains of 256,000 recorded previously. The fall is partially due to a later than-normal Thanksgiving Day which affected seasonal hiring.


About Aon Global Asset Allocation

Where are we in the economic cycle? What is the relative value of different asset classes? How are technical factors, such as regulation, impacting prices? Aon’s Global Asset Allocation team continually asks and answers questions like these. We use our findings to help clients make timely decisions about asset allocation in their schemes’ portfolios.

With over 160 years of combined experience, the team is one of the strongest in UK investment consultancy today.

Our experts analyze market movements and economic conditions around the world, setting risk and return expectations for global capital markets.

The team use those expectations to help our clients set and, when it’s right to do so, revise their long-term investment policies.

We believe that the medium-term (1–3 years) has been under exploited as a source of investment performance. Maintaining medium-term views that complement our long-term expectations, we help our clients to determine when to make changes to their investment strategy.


Appendix: Index Definitions

S&P 500 Index – The market-cap-weighted index includes 500 leading companies and captures approximately 80% of available market capitalization.

Russell 2000 Index - The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

MSCI World Index - A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets, representing 24 developed market country indices.

MSCI USA Value/Growth - The MSCI USA Value/Growth Index captures U.S. large and mid cap securities exhibiting overall value/growth style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12 month forward earnings to price and dividend yield. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

Bank of America Merrill Lynch U.S. Corporate Index - An unmanaged index considered representative of fixed-income obligations issued by U.S. corporates.

Bank of America Merrill Lynch U.S. High Yield Index - An unmanaged index considered representative of sub-investment grade fixed-income obligations issued by U.S. corporates.

Bloomberg Barclays U.S. Government Index - An unmanaged index considered representative of fixed-income obligations issued by the U.S. government.

Bloomberg Barclays Long Credit Index - An unmanaged index considered representative of long duration fixed-income obligations issued by U.S. corporates.

S&P GSCI – A world-production weighted index that is based on the average quantity of production of each commodity in the index.

JPMorgan EMBI Global Diversified – An unmanaged index considered representative of USD denominated fixed-income obligations issued by the emerging market governments.


Appendix: Data Disclaimers

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, "Barclays"), used under license. Bloomberg or Bloomberg's licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group [year]. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE®” “Russell®”, “FTSE Russell® are a trade mark(s) of the relevant LSE Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)


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