The Great Shutdown

Market Reaction: March 16, 2020


Globally, equity markets continued to plunge last week as the coronavirus spread fears of a significant global slowdown. In the United States, the S&P 500 tumbled 8.8% while the Dow Jones slipped 10.4%. Many equity markets across the world are now in bear market territory. The 10-year U.S. Treasury yield rose 20 basis points to 0.96%.

The coronavirus has quickly morphed into a “black swan” event with many governments enacting significant containment measures. Unfortunately, the containment measures meant to “shutdown” the virus also “shutdown” economic activity.

The expected slowdown in global activity may prove temporary, but the coronavirus’ impact is likely to be felt deeply in the second quarter of this year. Much of the damage to financial markets has likely already been done, but a sustainable market bottom may be dependent on a “flattening of the curve” in the rate of new infections in the U.S. and a sizable fiscal stimulus being passed by Congress. Citi’s 2020 year-end target for the S&P 500 has been reduced from 3,375 to 2,825 in light of the likely hit to corporate earnings.

The Week in Review

President Trump proposed several measures aimed at limiting the damage of the coronavirus. The President announced suspension of all travel from Europe to the United States for the next 30 days, $50 billion in Small Business Administration (SBA) loans for small businesses impacted by the virus (subject to Congressional approval), $200 billion in tax deferments without interest or penalties for certain individuals and businesses negatively impacted by the coronavirus, and an unspecified amount of payroll tax relief.

The last 2 out of 16 temporary hospitals in the epicenter city of Wuhan, China were shut down. The final group of 49 patients walked out of the temporary hospital to cheers. While the region remains under lockdown, China has been reporting significantly reduced numbers of new cases and appears to have reached its peak in the number of infections. It took China roughly two months from the beginning of its outbreak to reach its peak number of infections. South Korea appears to have reached its peak in roughly half a month.

The Great Shutdown

We are in the thick of the “Great Shutdown.” Here is a brief list of the developments that occurred over the weekend:

  1. The Federal Reserve decided to cut interest rates to zero and announced that it would expand its balance sheet by $700 billion (pledging to purchase $500 billion of U.S. Treasuries and $200 billion of mortgage-backed securities (MBS).
  2. Germany decided to close its borders with France, Austria, and Switzerland, except for commercial traffic. New York City decided to close the nation’s largest public school system, along with restaurants and bars.
  3. The European Union proposed a shutdown of non-essential travel for 30 days.
  4. The International Monetary Fund (IMF) announced that is ready to mobilize its $1 trillion in lending capacity to countries who are struggling to fight the coronavirus.
  5. China released economic data for the January – February timeframe that showed extremely sharp declines. Industrial output slipped 13.5% year-on-year – the worst decline in 30 years. Retail sales shrank 20.5% year-on-year and fixed asset investment (the money spent by companies on new equipment, buildings or land) fell by 24.5%.

The biggest news for financial markets was likely the Fed’s decision to cut rates to zero, but each of the headlines likely added to investors’ fears that the contraction in global growth in the second quarter of this year is likely to be significant and may be longer-lasting if the virus cannot be quickly contained. “Flattening the curve” or reducing the amount of community spread is likely paramount to a sustainable market bottom in the U.S. (see figure 1).

Figure 1: Number of Confirmed Coronavirus (COVID-19) Cases By Country
Figure 1: Number of Confirmed Coronavirus (COVID-19) Cases By Country
This chart shows the growth of cases COVID-19 in Hong Kong, Italy, Iran, Japan, Singapore, South Korea, and the United States.
Sources: Bloomberg and Citi Personal Wealth Management as of March 16th, 2020.

While the recent collapse in oil prices (due to a price war between OPEC producers and Russia) is generally good for the consumer with every penny decline in the price of gasoline equating to about $1 billion in consumer spending, that’s only true if people are traveling and commuting. If they are sitting at home or working remotely and not traveling, then the benefit may be less. In addition, the decline in oil prices forces a reduction in earnings estimates with U.S. energy companies likely to take an “earnings hit.” Because of this decline in oil prices, Citi’s Chief U.S. Equity Strategist Tobias Levkovich, cut his 2020 earnings-per-share forecast for the S&P 500 by $5.00 to $159.25. That brings his 2020 year-end S&P 500 target down from 3,375 to 2,825.

Probably the most common question we get from investors is “when is the bottom?” This is a very difficult question to answer as the situation remains fluid and we cannot accurately predict exactly how policymakers will react or the extent to which the virus spreads, but a S&P 500 level of between 2,000 and 2,200 seems like a reasonable range to think of as potential bottoming point. 

At the end of the day, there are three key things that we believe need to happen for a sustainable rally: 1) a stabilization of the number of infections in the U.S., 2) more fiscal stimulus, possibly in the range of $1 trillion (think back to when Congress initially gave the U.S. Treasury $700 billion of authority with the Troubled Asset Relief Program (or TARP) during the Global Financial Crisis), and 3) U.S. economic data.

While U.S. Treasury Secretary Mnuchin said over the weekend that he is not expecting a U.S. recession and that growth will rebound in the second half with a great deal of monetary and fiscal stimulus being put into the pipeline, it’s hard to have any confidence right now. It’s sort of like the captain of the ship trying to navigate without stars (or trying to drive without Google maps). Although we expect economic data to look extremely weak (and perhaps show an economic contraction) in the second quarter, a slew of economic data could help to calm investors’ nerves as it is likely to reduce the levels of uncertainty and provide some sort of guide path. Unfortunately, investors will likely have to wait until April to get a gauge on the bulk of U.S. economic data.

Financial markets will eventually recover. While the market “hates uncertainty,” “patience is a long-term investor’s best friend.” With the S&P 500 averaging a 16% return in the six months following the market bottom (see figure 2), we encourage investors to remain patient and recognize that time is likely to be the most effective cure for the Great Shutdown.

Figure 2: S&P 500 Performance During and After Epidemics
Epidemic / Pandemic S&P 500
Peak-to-Trough Dates During Emergency
S&P 500 Return
(% Change from Peak-to-Trough)
S&P 500 Return
(6-Months After Trough)
SARS January 15, 2003 - March 11, 2003 -12.80% 23.70%
Avian Influenza January 23, 2004 - August 12, 2004 -6.90% 11.70%
MERS September 1, 2012 - November 15, 2012 -7.30% 22.60%
Ebola December 31, 2013 - February 3, 2014 -5.80% 11.30%
Zika November 6, 2015 - November 11, 2016 -12.90% 10.60%
Average: -9.14% 15.98%
This table shows S&P performance during and after past health epidemics.
Sources: Citi Investment Research and Analysis – U.S. Equity Strategy, Bloomberg and Citi Personal Wealth Management as of March 16, 2020. There can be no assurance that these market conditions will remain in the future. Past performance does not guarantee future results.

Market Indicators

Figure 3: U.S. and International Stock Market Returns and Select Assets
U.S. Stock Market Returns and Select Assets
Index Wkly Chg YTD 12 Months Div. Yield
Dow Jones -10.4% -18.8% -9.8% 3.1%
S&P 500 -8.8% -16.1% -3.6% 2.5%
NASDAQ -8.2% -12.2% 3.0% 1.4%
Instrument Wkly Chg YTD 12 Months Level
10-Year Treasury Yield (%) 19.8 bps -95 bps -160 bps 0.96%
Gold ($/Oz.) -8.6% 0.8% 16.9% $1,529.8
Oil ($/bbl) -23.1% -48.0% -45.5% $31.73
International Stock Market Returns
Index Wkly Chg YTD 12 Months Div Yield
Global -12.4% -20.2% -10.8% 2.9%
Europe -20.3% -29.3% -22.8% 4.9%
Japan -15.7% -24.5% -16.0% 3.2%
Emerging Markets -11.9% -19.9% -13.0% 3.2%
This table shows changes and returns over various periods for U.S. and international stocks and select assets.
Sources: Bloomberg and Citi Personal Wealth Management as of March 13, 2020. Note 1 (Equities): Global = MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are based in U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending on the effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy ounce; Oil = West Texas Intermediate crude at Cushing, OK.
Date Time Event Period Surv(M) Prior
3/16 8:30 Empire Manufacturing Mar 3.0 12.9
3/17 8:30 Retail Sales Advance MoM Feb 0.2% 0.3%
3/17 9:15 Industrial Production MoM Feb 0.4% -0.3%
3/17 10:00 NAHB Housing Market Index Mar 73.0 74.0
3/18 8:30 Building Permits Feb 1500k 1551k
3/18 8:30 Housing Starts Feb 1500k 1567k
3/19 8:30 Philadelphia Fed Business Outlook Mar 10.0 36.7
3/19 8:30 Initial Jobless Claims 3/14 220k 211k
3/19 10:00 Leading Index Feb 0.1% 0.8%
3/20 10:00 Existing Home Sales Feb 5.51m 5.46m
Sources: Bloomberg and Citi Personal Wealth Management as of March 13, 2020.