by Jason Norris, CFA
Executive Vice President of Research
The rollercoaster ride continued this week as stocks moved at least 2 percent four out of five days; however, with all of that volatility the S&P 500 was up 1 percent. The week started with a surprise 50-basis point cut in the fed funds rate. Bond yields continued to plummet with the 10-year U.S. Treasury yield falling to 0.76 percent from 1.31 percent. While the jobs report Friday continued to show a healthy environment, investors are viewing that as backward-looking and are focusing on what the potential economic effects of the COVID-19 virus will be.
The equity market volatility we have seen of late is not unprecedented. Investors experienced similar daily volatility in the fourth quarter of 2018, during the summer of 2015 and throughout 2011. We did not experience a bear market during those periods, and we are currently 13 percent below the January all-time high. These moves are common in any given year, assuming no recession. Also, these moves are not being driven by the average investors. In talking with various equity trading desks, they report that they are seeing the heightened equity trading volumes being driven by opportunistic high-frequency trading firms, and not by traditional long-only money managers. Estimates for GDP growth in the first and second quarter are for 0-0.5 percent growth. We do believe we will get a rebound in the second half of the year, thus we do not see us falling into a recession.
Stunningly Low Rates
While treasury yields are in record-low territory and the market is expecting another 50-basis point cut in the fed funds rate on March 18, we do not believe rates will drop to below zero. Fed Chair Powell has stated that he has no desire to go negative. Further, as we stated in our 2020 Outlook, negative rates do not stimulate the economy and one need only look no further than the examples of Japan and Europe to see that.
However, as a reminder, the Federal Reserve only directly controls the fed funds rate, meaning other interest rates are at the mercy of the market. Therefore, even if the fed funds rate stays above zero, it does not mean other rates can get a lot closer.
Low mortgage rates will provide some stimulus for U.S. consumers. The current average 30-year fixed mortgage is around 3.25 percent. At this level, over 11 million borrows could decrease their mortgage rate by at least three-quarters of one percent. If rates get as low at 3 percent, then 19.4 million borrows could lower their rates by that much.
Stay the Course
We do not know when the correction will exhaust itself; however, we do believe that equities will be higher by year-end. In fact, when looking at China as an example, we see that the Chinese A Share stock market fell over 12 percent from January 20 to February 3. As economic activity has slowly started coming back, the stock market has reflected that improvement. Since February 3, Chinese stocks are up 19 percent to a two-year high. As Mad Money TV Host Jim Cramer says, “There is always a bull market somewhere.”
While Ferguson Wellman is not selling equities, we are not selling bonds either. However, we are repositioning our equity portfolios. Some recent moves have been reducing interest-rate-sensitive financials and travel-exposed companies. We have been adding to housing-exposed names and healthcare. These adjustments have been cash neutral. We have not made any asset allocation changes in this environment.
Week in Review and Our Takeaways:
We entered 2020 expecting a 10-15 percent correct and we are now experiencing it
We believe that the economic effects of the COVID-19 virus will not result in a recession, thus no bear market