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 risks 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 stock 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 yield on the Bloomberg Barclays U.S. Aggregate Bond 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. bond 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 risk 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 volatility 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.
Bonds Provide Defense
Stock 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 yields 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 stocks are dropping and our portfolios would benefit from a bit of ballast, bonds tend to climb—just what we’re seeing today.
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:
- 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.
- 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.
- 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.
- 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.
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.