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Coronavirus fears lead to wild market swings, S&P 500 posts modest gains

What to do when the market goes down? Read the opinions of the investment gurus who are quoted in the Wall Street Journal. And, as you read, laugh. We all know that the pundits can’t predict short-term market movements. Yet there they are, desperately trying to sound intelligent when they really haven’t got a clue. – Jonathan Clements

The S&P 500 Index posted a modest gain last week but that fails to explain the wild swings and volatility that the stock market experienced on a day-to-day basis. If you enjoy roller coaster rides, the market provided all the thrills and spills that you could possibly want. The Dow Jones Industrial Average recorded gains of more than 1,100 points on Monday and Wednesday but dropped by triple digits on the other three days to post a gain for the week of 455 points or 1.8%. Fear and uncertainty gripped the markets once again as it is believed that as more tests for the coronavirus are conducted, the number of confirmed cases of the virus in the U.S. will increase. To address the impact that the virus will have on the global economy, the Group of Seven finance ministers met and said that it will use all of the policy tools at its disposal to mitigate the economic slowdown. Congress also passed a $8.3 billion emergency funding package to help deal with the spread of the virus and other stimulus measures were being considered by the government. In a surprise move on Tuesday, the Federal Reserve announced an emergency interest rate cut of 50 basis points to 1.00% to 1.25% to help combat the effect of the coronavirus on the economy. (A basis point is one hundredth of one percent). While the stock market initially moved higher on the news, it closed the day about 3% lower as investors were shocked at the timing and size of the cut, thinking the Fed must know that the economy is worse off than people realize. The Fed has its regularly scheduled meeting next week and it is widely anticipated that another rate cut may be announced. The surprise rate cut rattled the bond market, too, as bond yields plunged to their lowest levels ever. The yield on the 10-year Treasury ended the week below 1.00% at 0.71%, compared to 1.90% at the start of the year, while the yield on the 30-year bond settled at 1.25%. The price of oil also plunged to below $42.00 a barrel after OPEC and Russia failed to agree on production cuts to help offset the decline in demand caused by a slowing global economy. Given the fact that there are still too many unknowns with regard to the virus and its economic impact, markets are likely to remain volatile in coming weeks.

Last Week

Economic data didn’t matter last week since the focus was on the coronavirus but the reports were favorable. The employment report for February showed that 273,000 new jobs were created, far more than expected, and that the unemployment rate ticked lower to 3.5% from 3.6%. Payroll numbers were also revised substantially higher in both December and January and average hourly earnings rose by 3% over the past year. The ADP private payrolls number also was much better than forecast and weekly jobless claims were lower than expected and still near a 50-year low. The ISM non-manufacturing or services sector index in February also was much better than anticipated and at the highest level in one year. The ISM manufacturing index in February was slightly below expectations but still in expansion territory while construction spending in January far exceeded estimates due to low interest rates and milder weather.

For the week, the Dow Jones Industrial Average gained 1.8% to close at 25,864 while the S&P 500 Index added 0.6% to close at 2,972. The Nasdaq Composite Index rose 0.1% to close at 8,575.

This Week

Both the producer price index (PPI) and the consumer price index (CPI) for February are expected to show modest increases, with the CPI showing a year-over year increase in inflation of only 2.2%. The University of Michigan preliminary consumer sentiment index for March is expected to be down from the reading in February due to the potential impact on the economy of the coronavirus.

The European Central Bank (ECB) meets this week and is expected to lower its key short-term interest rate from an already record low level of negative 0.5%. Fourth quarter gross domestic product (GDP) in the euro zone was barely positive and the coronavirus outbreak could tip their economy into a recession.

The most notable companies scheduled to report fourth quarter earnings this week are Dick’s Sporting Goods, Vera Bradley, Dollar General, Gap, Adobe, Broadcom and Oracle.

Portfolio Strategy

The steep plunge in bond yields to historic low levels never seen before reflects the fear that investors have about the coronavirus and belies the strong economic data last week. (Bond prices and yields move inversely to one another). The jobs report is usually the most anticipated government economic report every month and the latest one for February shows that the economy had a lot of momentum before the onset of the virus. But all of the positive economic data last week occurred before the spread of the virus and was ignored by investors since it’s backward-looking and not forward-looking. What effect the virus has on the economy is uncertain and it is that uncertainty that is causing investors to panic and seek safe havens in the form of U.S. Treasury securities. The fear of the unknown is powerful and the fact that the virus is new leads to unanswered questions about the amount of damage it will do to both the economy and one’s health. While the economy will undoubtedly slow as a result of the coronavirus, the potential weakness does in no way justify a 2-year Treasury yield of 0.49% and a 10-year Treasury yield of 0.71%. As low as these yields are, they are still higher than comparable yields in Europe and Japan where they are negative. With the odds favoring another Federal Reserve rate cut at their March meeting and additional government stimulus measures, the economy should be able to recover this year once there is evidence that the virus is contained.