At 401(k) Engineers, it is important to us that you are well informed about what’s happening in the markets. Here are a few of the key topics of conversation that we feel deserve the most attention this month. If you have any questions or would like to continue the conversation, let us know, and we appreciate the opportunity.
Coronavirus Fears Drive Markets While the Economy Continues to Grow
What’s going on?
Markets were rattled by reports of a coronavirus outbreak in China, which has caused tens of thousands of people around the world to be sickened by the illness, which has no vaccine. During the initial reporting, market participants made “safe haven trades” by moving from stocks to U.S. Treasuries and other high-rated fixed-income investments. Although the coronavirus has yet to be contained, markets returned to new highs by February 14th, as the appeal of growth companies continues its momentum from 2019.
Why is it important?
China is the second-largest economy in the world, and the potential for a greater economic slowdown due to the viral outbreak is a legitimate concern. Outbreaks such as these can be a useful measurement of how comfortable investors are with their holdings. When selloffs occur due to headlines such as the coronavirus, it can signal that market participants are nervous that prices are too high. Furthermore, when new highs occur shortly after those selloffs, such as what we have seen in the past few weeks, it can be a signal that investors have convictions in the stock markets' ability to create additional returns per measured unit of risk.
What do we think about its potential impact?
When we look at the data from the previous viral outbreaks of the past twenty years, we see that even though pullbacks occur in the short-term, they do not show any impact in the long-term of a year or more. Although we are not concerned at this time with any long-term investment effects from the coronavirus, we are paying close attention to Treasury yields are they are impacted by safety trades. When investors move from stocks to historically safer investments such as the 10-year Treasury, yields go down. We watched as the 10-year yield dropped below the 90-day Treasury yield during the initial selloff credited to the coronavirus. The chances of the Federal Reserve adjusting their interest rate policy goes up when short-term Treasury yields are more attractive than long-term Treasury yields, and if the Fed makes changes to its interest rate policies, it can make an impact on the valuations of stocks as well as the broader economy. Therefore, we are not concerned about the coronavirus derailing the market or economy in the long-term; however, we are keeping a close eye on how pullbacks in the marketplace can influence fixed-income yields and the Federal Reserve’s interest rate policy.
The month ahead:
Economic data of the U.S. consumer continues to grow, with GDP reports showing an annual growth rate of 2.1% in Q4 2019, as U.S. payrolls reporting a 225,000 expansion in January, beating consensus forecasts. The labor force participation rate increased to its highest reading since early 2013 as well (source, BLS.gov). Since January of last year, the jobless rate fell to 3.6% from 4.0%, signaling that the job market and economy are in a position of strength. We will continue to focus on economic data during the next month as well as corporate earnings as they are reported as a helpful guide when unforeseen headlines which have the potential to cause investor concern are reported.
The bottom line:
The U.S. economy, driven by a healthy consumer, continues to grow at a steady pace. From a historical perspective, initial fears from investors due to the impacts of the coronavirus outbreak are normal and tend to fade in the long-term. We are not concerned with a recession in the next 6-12 months and will continue to monitor essential sources of data as they are reported over the course of the following month.