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- Northwestern Mutual
- Mar 09, 2020
Bond Yields, ‘Fear Gauge’ in Rare Territory
Did you catch yourself peeking at the phone a little more often this week? From the Fed’s emergency rate cut, the latest coronavirus news, bond yields hitting record lows, Super Tuesday … a lot happened last week — and we’ll get to all of that shortly. But first, let’s hit a reset button as we enter a fresh week.
No one can say what the next twist or turn is regarding the coronavirus outbreak, so we won’t either. However, we do know a well-constructed, diversified financial plan already accounts for something like this. A tailored plan that blends stocks, bonds, cash value life insurance, real estate and other assets is built for stability during choppy markets. That’s the result of managing risk through diversification.
The broader point is this: The short-term performance of any single asset class in your portfolio shouldn’t impact the long-term trajectory of your plan. It’s not about any single piece, because all the pieces are working together.
With that, let’s dive a little deeper into the week that was and the week to come.
WALL STREET WRAP
Policymakers Confront Coronavirus: In our initial comments about the coronavirus, we said prepare for policymakers to step in and bolster the economy through any coronavirus-related disruptions. Last week, they did just that.
The Federal Reserve on Tuesday unanimously agreed to slash interest rates by 0.5 percent in an emergency policy move, bringing the federal-funds rate within a range of 1 to 1.25 percent. Fed Chair Jerome Powell cited material changes regarding coronavirus risk and pledged to keep the economy strong through the challenge ahead. On Friday, after an expedited journey through Congress, U.S. President Donald Trump signed an $8.3 billion aid package to support health officials, develop a vaccine and fund prevention and preparedness methods.
Globally, the World Bank pledged $12 billion in aid, and the IMF is pledging $50 billion to fight the coronavirus in emerging economies. That’s in addition to efforts central banks and governments around the world are implementing or plan to soon. Clearly stimulus is here and more could be coming. Still, we remind that pumping economies full of stimulus doesn’t guarantee a soft landing, but it has a pretty good track record.
Biden Evens the Scales With Sanders: After several key victories on Super Tuesday, former Vice President Joe Biden mounted a significant comeback in Democratic primary elections. Biden has now received 664 delegates to Sanders’ 573 (1,991 delegates are needed to win the nomination). Stocks of health insurance companies, for example, rose sharply the following day Wednesday and led the market. Candidates Pete Buttigieg, Sen. Amy Klobuchar, Sen. Elizabeth Warren and Mike Bloomberg have all now dropped out of the race.
U.S. Employment a Sign of Strength: To frame risks from the coronavirus, we’ve said it’s important to factor in the economy’s health before the outbreak. And, as the data show, it was generally healthy. Take February’s job figures, for example. Non-farm payrolls rose 273,000, matching January’s upwardly revised 273,000 total, and the unemployment rate dipped back down to 3.5 percent. That makes two consecutive months of strong job growth. But, importantly, labor participation remained at 63.4 percent. That means more people are still coming back into the labor force, another sign of strength.
A Check on PMIs: The U.S. ISM manufacturing PMI hit 50.1, down from 50.9 the month prior. While the index declined, it remains in expansion territory for the second month in a row.
However, the much larger services sector of the economy remained in gear. The ISM non-manufacturing PMI hit a one-year high of 57.3. But we also saw the new orders index hit 63.1, which is a very strong reading and a leading indicator of future growth. Keep in mind, we’ll probably see some volatile data in the months ahead, but we still think the economy is in good position to push through coronavirus disruptions.
THE WEEK AHEAD
Bond Yields in Focus: This week, you might continue to see headlines focusing on bond yields. The yield on the 10-year Treasury bond briefly dipped below 0.7 percent Friday before closing the week at 0.764 percent. That’s historically low. However, we still think bonds play an essential role as a volatility ballast within a well-diversified portfolio. Mike Helmuth, Chief Fixed Income Portfolio Manager, Northwestern Mutual Wealth Management, recently discussed the crucial role that bonds play in an investment strategy, and why they still belong in your portfolio.
Data We’re Looking For: This week we’ll be watching for data from small businesses, consumer sentiment and consumer prices.
Heightened Risk on Wall Street: The VIX, or the market’s so-called “Fear Gauge”, reached an elevated reading 54.39 before closing the week at 41.94. This is the highest closing since 2011, which means the market is volatile and a bit panicky. However, if history is a guide, 12-month returns tends to positive when the fear gauge reaches these elevated levels. You can read more about our study.
The bigger point is that stocks are for intermediate- to long-term goals. Rather than chasing trades or reacting like everyone else, just trust the plan. If you’ve planned, the best course of action in times like these is often to do nothing at all.
Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.
There are a number of risks with investing in the market; if you want to learn more about them and other investment related terminology and disclosures click here.
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