Full Sails!

Full sails!  Stocks rose yesterday as some workers got back to work in China while the Coronavirus continued its spread.  The S&P500 found a fresh high as crude oil found its 1-year low.

N O T E W O R T H Y

• Heads AND tails?  These are unique times indeed!  No, I am not talking about culture or politics - that’s the work of pundits and Facebook ranters.  I am referring to the financial markets!  Tradition has it, for good reason, that bonds go down when stocks go up.  When stocks go up, investors believe that the economy will be doing well in coming quarters.  When bond investors believe that the economy will be strong, they expect that inflation will be on the rise causing them to require higher yields from their bond investments.  More practically, if the economy is booming, the Fed will eventually raise rates.  Higher yields and higher interest rates mean lower prices for bonds.  Got it?  Stocks go up -> bonds go down… and vice versa.  That is the way things work… normally.  It is also the basis for many second-rate money managers who allocate their clients’ assets between simply stocks and bonds using high-cost mutual funds.  If stocks get beaten up, bonds should rise and offer some downside protection… diversification. But as we have seen recently that simple investment thesis can be flawed.  Last year while stocks rose, so did bonds!  Guess what?  The discrepancy continues. Yesterday,  the S&P500 closed at a fresh all-time high and the 10-year treasury note rallied bringing its yield down -2 basis points to 1.56%, very close to the bottom of its range (the recent low was 1.49% last September, the all-time low was 1.46% in 2016). Bond investors continue to worry about the fragile global economy as the Coronavirus continues to spread while stock investors see all good things on the road ahead. Unfortunately only one of the two will come out as the winner.  For now, the uncertainty is paying off for those investors who are invested in both asset classes.  For those invested in only one of the two, things are not likely to end well… if you are on the wrong side when the correlation reverts to the mean.  The moral of the story here is that diversification is critical… also… diversification across multiple asset classes, not just stocks and bonds, is the best way to manage portfolio risk for long term success.
• Fed up.  Last Friday, the Fed released its economic assessment to Congress, offering us a hint at what the Central Bankers are thinking about these days. Last year it was all about “things are good in the US, trade war is bad, weak Chinese economy is bad, don’t worry we are here to support you” - that clearly helped the market reach new highs... and lots of them. Chairman Powell is due to be on Capitol Hill today to address lawmakers and investors surely want to know what the secretive group has on its mind.  Yesterday, San Francisco Fed President Mary Daly said that she was comfortable with policy the way it is for the “foreseeable future”… assuming nothing unexpected occurs.  Powell is likely to say the same thing although he is likely to highlight the Coronavirus as a risk factor.  This, as the Fed is under fresh pressure from the President to be more aggressive in their accommodations.  What are investors hoping for? According to Fed Funds Futures yesterday, there was a 62.8% chance of a Fed rate cut in July.  One week ago, investors gave slightly better than even odds of a cut (54.8%).  One month ago the odds of a July cut were at 31.7% with a 6.5% chance of a rate hike.  So, the trend is towards a rate cut.  This may explain why stocks are rallying to new highs in the face of the expanding Coronavirus risks.

THE MARKETS

Stocks rallied to new highs yesterday as China rushed more aid to its feverish economy and workers slowly returned to their jobs.  The S&P500 traded up by +0.73%, the Dow Jones Industrial Average climbed by +0.6%, the Russell 2000 advanced by +0.66%, and the NASDAQ Composite Index jumped by +1.13%.  Bonds also rallied yesterday and 10-year treasury yields fell by -2 basis points to 1.56%.  Crude oil continued to slide, falling by -1.49% settling back below $50.

NXT UP

- JOLTS Job Openings is expected to show an increase in job openings from 6.8 million to 6.925 million.

- Jerome Powell will speak on Capitol Hill at 10:00 AM EST.

- Fed Governor Randall Quarles, St. Louis Fed President James Bullard, and Minneapolis Fed President Neel Kashkari will all speak today.

- This morning Hilton, Hasbro, and Virtu Financial beat while Under Armor and Martin Marietta Materials missed expectations. Before the bell we will hear from Dominion Energy and Goodyear Tire & Rubber.  After the bell announcements are expected to include Lyft and Akamai.

daily chartbook 2020-02-11