Insight & Commentaries

To Play it Safe

It is not too soon to start imagining a post-virus world. At some point, this will pass into the history books. For now, personal survivability is paramount until whenever that day comes. Surviving means doing everything possible to stay physically healthy. The investing analog holds as well — the key for investors now is corporate survivability. We believe now is the time to play it safe, focus on quality, and avoid buying low-quality, cheap stocks. Bad News Ahead The next phase will be full of bad news about the economy. Last week’s 3.25 million weekly unemployment insurance claims report is…

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The 2020 coronavirus outbreak is taking a toll and investing in times of uncertainty can be challenging. Large moves in stock and bond prices have again become the rule rather than the exception. We would like to share a series of exhibits and perspective pieces that you might find helpful in navigating today’s turbulent markets.

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Viewpoint 2020

Worries over rising rates and trade faded in 2019, prompting sizable gains in both bonds and stocks. Global growth seems to be firming and the United States is exhibiting stronger growth than most other developed nations as we start 2020. Low interest rates, rising wages, and record wealth is driving growth, but above average valuations reduce return expectations. This report covers Washington Crossing Advisors’ long-run views as we head into 2020. These top-down views are central to our tactical asset allocation decisions and recommendations.

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We believe companies with a history of increasing dividends provide a good starting place in a search for fundamentally strong and growing companies. Importantly, steady dividend growth often follows consistent profitability and shareholder-focused management. A dividend growth perspective looks beyond today’s yield and considers other factors, such as quality, growth, risk, and value. A track record of dividend increases can be viewed as a tangible signal by a company’s management that they are both willing and able to boost a payment to shareholders. This commitment suggests quality fundamentals currently and an expectation of continued improvement into the future. Full Text

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A Month’s Time

In just a month’s time, the U.S. stock market’s value is back to where it was in late 2018. The speed and intensity of the recent decline is unusual as the United States’ equity markets lost $11 trillion (30%) in just one month. This 30% decline is also reflected in the Dow Jones Industrial Average seen below. The chart shows how this episode compares with past notable declines. In contrast to a month’s time, it took eight months for the Dow to give up 30% during the 2000-2002 market decline and fourteen months for the index to shed that amount…

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An eruption of volatility hit markets last week as the World Health Organization declared Covid-19 a pandemic. This extraordinary outbreak will throw out of kilter many aspects of daily lives. Markets are rapidly reestimating risk and trying to predict the size and duration of the shock to the global economy. Central banks and governments are also stepping up response to unfolding conditions. Yesterday, the Federal Reserve cut their benchmark interest rate by 100 basis points (-1.0%) to a range of 0-0.25%, committed to buying $500 billion of U.S. Treasuries and $200 billion of mortgage-backed securities, and took other measures to…

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Safe Havens

Bond prices continue to surge, driven by coronavirus fears and a new oil price war. Prices of long-term U.S. Treasury bonds are rising rapidly, sending bond yields to record lows. Bonds at the longest end of the U.S. Treasury curve are approaching gains of 20-30% year-to-date. Similar bond price action occurred in the past, but never before have U.S. interest rates reached levels seen today. U.S. 20-year Treasury yields have now fallen through one percent, following the 10-year Treasury amid a broader global pattern of rapidly declining and ultra-low rates. The 30-year U.S. Treasury bond yield currently stands at a…

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The spread of coronavirus outside China hit markets hard last week. Stocks fell on reports of new infections and deaths in Italy and elsewhere. The sharp drop in stock prices, coupled with a plunge in Treasury bond yields, leaves the S&P 500 dividend yield now higher than the 30 year U.S. Treasury yield (first chart, below). Domestic stocks suffered more significant declines than foreign due to concern the virus could spread in the United States (second chart, below). The chart shows pronounced weakness in the S&P 500 (a measure of domestic stock performance) versus the MSCI EAFE index (a measure…

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A Hit to Q1 Growth

Global business activity is taking an unexpected hit from worries over the coronavirus outbreak, according to recent data from IHS Markit. As the chart below shows, the IHS Markit purchasing managers’ index fell sharply through mid-February with U.S. Services Business Activity Index falling to 49.4 (53.4 in January), a 76-month low. The IHS Manufacturing Survey (below) also fell to 50.8 (51.9 in January), a 6-month low. New orders fell for the first time since data collection began in 2009. Hesitancy among firms due to coronavirus is causing a decline in business activity in the United States. This is the conclusion…

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The outbreak, centered within China’s industrial heartland, is upending life and closing business across many parts of China. According to a report from CNBC, 20 Chinese provinces covering 80% of Chinese GDP, and 90% of exports are under some form of lockdown. Further complicating the situation is the timing of the Chinese New Year festival from January 25 through February 8. Because many businesses usually close during the festival, several years ago, China’s National Bureau of Statistics decided to combine January and February data reports into a single month and release the information in mid-March. In other words, much of…

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A Path Forward

Many factors conspire to cause stock values to rise and fall, but one stands above all others — profits. Successful business investment is the beginning of profit growth and rising stock values. Such activities enlarge earnings power and drive the value of an enterprise over time. But last year’s 30% rise in stock values1 was not accompanied by a rising tide of earnings and capital investment. Instead, the rise was mostly driven by investors’ willingness to pay higher prices for the same level of earnings. In our view, stock values will continue to rise only as a result of continued…

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The Bull Run

The average American household’s net worth soared to $885,000 last year, 65% higher than a decade ago, according to data from the Federal Reserve and Census Bureau1. Much of the gain came from financial markets where both stocks and bonds surged. Conditions seem supportive for further gains, but valuations are looking full. Even though fundamentals look good, returns in the future should be lower because stock and bond yields sit at historic lows and because markets are already expecting good news. Rise of Liquidity Other than a small decline last week on coronavirus concerns, stocks have been quiet. When central…

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The past few months, our WCA Fundamental Conditions Barometer (Table A) has bounced around sideways with no real direction. This sideways behavior comes after a monetary policy induced spring surge. With markets now in sync with central bank messaging, there is little new impetus to drive risk appetite. Ahead lies the prospect that a partial trade deal with China could bolster confidence, reenergize growth, and boost corporate earnings. Missing Link The missing link in the argument for a furthering of the current bull market is in the earnings story. Growth is critically important for any long-run bullish argument for stocks….

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