Markets Yield to High Anxiety

Please note: This update was prepared on Friday, March 6, 2020, before the market’s close.

After another week of uncertainty about the spread of the coronavirus, as well as the potential toll on the global economy and investors, many on Wall Street decided to wash their hands of short-term risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. and sold.

Yet, over the course of this week, aggressive selling was occasionally met with aggressive buying. Through Thursday, the S&P 500 had moved up or down at least 2% in seven of the last nine trading days—and today is poised to make it eight of 10. Over the last 60-plus years, the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market has averaged a 0.7% daily move, suggesting that emotions are running high and investors may be running a bit scared.

Still, through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 8.0% and 6.1% on the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 8.5%. As of Thursday, the yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index has declined to 1.50%, down from 1.84% a week ago and 2.31% at 2019’s end. On a total return basis, the U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has gained 4.6% for the year.

For those of us who’ve endured numerous unsettling market times before, seeing others trade on fear is nothing new. We know as well as you do that the last two weeks haven’t been easy; after all, we invest in the same markets and strategies that you do. But riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. is ever-present in the markets, whether it is always perceived as risk, or not.

Historically, the market rewards those who stick with their long-term strategies and avoid emotion-driven portfolio moves.

Our response is to remain disciplined, rational and calm. Historically, the market rewards those who stick with their long-term strategies and avoid emotion-driven portfolio moves. And, as we’ve said many times before: Fear is not an investment discipline. While volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. is never easy to stomach, we continue to believe that our tactical strategies are well-suited to help us navigate today’s markets.

Federal Policymakers Try to Safeguard the Economy

For the first time since the financial crisis, Federal Reserve policymakers cut interest rates between scheduled meetings—by 0.50% to a range of 1.00% to 1.25%—citing “evolving risks” posed to the economy by a potential wider viral outbreak. Just one week earlier, Fed Chair Jerome Powell had said the economy was on a strong footing. So, why the about-face?

Some disconcerting data is beginning to come in from overseas. For example, Chinese manufacturing activity has been falling at a record pace. On one hand, this is not surprising given the moves taken by China’s leaders to combat the spread of COVID-19 disease; it has shuttered schools, factories and sometimes whole cities. This has given rise to worries about broken supply chains for U.S. companies, something many have already begun discussing in earnings calls with investors.

That said, the move felt rash and a good rationale for it seems lacking. It’s possible the central bank saw evidence of the virus’ impact on the U.S. that has not been released to the public, but Chair Powell didn’t provide any new facts or figures to support the decision; perhaps he assumed that the move itself speaks volumes.

Time will tell what meaningful data underlaid the Federal Reserve’s action this week. For the moment, you could call us perplexed.

BondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Provide Defense

StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market records may seem like a distant memory (even though the S&P 500 hit an all-time high on February 19, merely two-plus weeks ago), but the bond market has been on a tear as traders have sought stable ground amid coronavirus worries. As we go to print today, the yield on the benchmark 10-year Treasury bond continues to drop to unprecedented levels; it fell to a record intraday low of 0.67% this morning before moving modestly higher in the afternoon. (Remember, as demand climbs and bond prices rise, their yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. fall.)

With yields this low, bond funds aren’t going to generate large returns in the foreseeable future. But that doesn’t mean they don’t play an important role in many portfolios. Bonds and bond funds remain a valuable tool to offset the risks we take to earn better returns in the stock market. During periods when stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. are dropping and our portfolios would benefit from a bit of ballast, bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. tend to climb—just what we’re seeing today.

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Financial Planning Focus:

Should You Refinance Your Mortgage Now?

The Fed’s action this week sent the average rate on a 30-year fixed mortgage down to 3.56%, the lowest level since 2016, making it natural to wonder if now is a good time to refinance. A simple question on its face, but the answer can be complicated.

Here are four factors to consider before rushing to engage a mortgage broker:

1. How much can you save? It’s worth digging out and reviewing the paperwork for your existing loan to confirm the exact rate you’re paying now and what your original closing costs were. Follow that up with a trip to an online mortgage calculator—you can try Bankrate, Zillow or use your bank’s website—to estimate the difference in your monthly payment and how much you could save by refinancing.
2. What are the costs? As when you bought your home, there will be closing costs associated with a refinance. These range anywhere from 2% to 5% of the total principal of the loan, and can vary by lender and region. Your current loan documents should provide a general sense of the costs you’ll face. By dividing your estimated monthly savings from a refinance into your total closing costs, you can determine approximately how many months you’ll need to stay in your current home to make the refinance pay off. If there’s a good chance you’ll be moving before the time is up—a career change, to downsize or you plan to retire elsewhere—then the juice likely isn’t worth the squeeze.
3. What rate can you get? No one fills out loan applications for fun, but it’s essential to shop around to make sure you get the lowest rate you can on your refinance. Mortgage lenders are required by the Consumer Financial Protection Bureau to give you a “loan estimate” that compares offers from lenders. Make sure to review not only the interest rates but also costs—some lenders may offer a lowball rate, then tack on higher closing costs.
4. Are you still paying PMI? Beyond simply lowering your rate, another factor is whether you’re paying private mortgage insurance (PMI). Lenders typically require you to pay PMI if you put less than 20% down on your home. Refinancing may allow you to cross that 20% threshold more quickly—getting rid of that pesky PMI and saving you money over and above the difference in your monthly payment.

If that seems complicated, here’s one quick rule of thumb: If the difference in interest rates isn’t at least 0.75%, then the refinance probably isn’t worth it.

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Looking Ahead

We expect the coronavirus to remain front-and-center on Wall Street next week. We’ll also get reports on inflation, jobs and consumer sentiment—none of which are likely to move the markets.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.