by Shawn Narancich, CFA
Executive Vice President of Research
Always a Bull Market Somewhere
A mixed set of economic data set against ongoing news of coronavirus infections sent stocks and bonds in opposite directions. As quarantines and lost production in China begin to impact supply chains and the likes of Apple, bonds continued their long tenured ascent, helping offset the week’s equity losses for those investors with a well-diversified portfolio. Most eye catching to us was the move in 30-year U.S. Treasury bonds, which traded up in price to the extent that the government’s longest duration bond touched its lowest yield ever, at 1.89 percent. Adding to unusually strong returns in 2019, Treasury bonds are now up more than 7 percent so far in 2020 and outpacing gains in U.S. equities year-to-date.
Eyes on the Fed
The decline in bond yields has once again put the Fed’s monetary policy under scrutiny. As was the case for a stretch in 2019, the yield curve is once again inverted – the yield on benchmark 10-year Treasuries now stands 13 basis points below Federal funds, the rate at which banks lend money to each other in overnight markets and which the Fed controls through its open market operations. Minutes released this week from the Fed’s January meeting showed policymakers content to leave short-term rates where they are, observing ample monetary stimulus to keep a full employment economic expansion intact while also promoting conditions to boost core inflation to its 2 percent objective. But as it was compelled to acknowledge last year, an inverted yield curve that endures for too long can send recessionary signals to businesses and consumers. For now, the Fed remains in wait-and-see mode regarding what is shaping up to be slower first quarter GDP growth impacted by the loss of Boeing 737 MAX production and as yet unquantifiable impacts from the coronavirus.
Housing Tailwinds
Yield curve considerations aside, low interest rates are unequivocally good news for homeowners, who are enjoying the ability to obtain mortgage financing at rates approaching the mid-3 percent level. With favorable interest rates incenting activity, the housing market is responding. Data released this week revealed both existing home sales and U.S. housing starts exceeding expectations, with permits to build new housing rising to the highest level since 2007. Consumers gainfully employed in a robust job market and enjoying 401(k) balances buoyed by near-record stocks prices are all too happy to oblige. In addition to new homes being built and existing ones sold, we expect consumers to expend additional sums on furnishing and renovating these big-ticket purchases. Aside from what we believe will be the temporary economic impact of the coronavirus focused mostly in Asia, the housing market should prove to be a durable support of the ongoing U.S. economic expansion.
Our Takeaways from the Week
Stocks pulled back amid continuing coronavirus headlines and lower initial purchasing manager numbers reported for February
The 30-year U.S. Treasury bond traded to its lowest yield ever