Insight & Commentaries
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…
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…
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…
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…
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…
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…
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…
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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