What We're Watching - Coronavirus and the Markets
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Emergence of the coronavirus strain known as COVID-19 has not only had an impact on the way we conduct our daily lives in a short period of time but has also dictated movements in financial markets. The U.S. economy is heavily reliant upon consumption of services and consumer spending to drive GDP growth, and both areas have been impacted greatly by COVID-19. How we consume and spend money on things such as movies, sporting events and travel will dramatically shift as precautions are taken to limit potential exposure to the virus.

Economic uncertainty and market volatility has subsided since March, but returned in the back half of June amid rising COVID-19 case counts in Arizona, Florida, and Texas which caused bars and restaurants to close and states to scale back broader re-opening plans. Data surrounding the U.S. economy re-opening in May was initially encouraging, but retailers, as well as dining establishments, closed, some permanently, again in COVID-19 hotspots as July began. We continue to expect a more gradual and uneven economic recovery than what is indicated by the S&P 500 sitting 2% or thereabouts away from an all-time high, but there are a number of ‘shots on goal’ and many pharmaceutical manufacturers are developing a COVID-19 vaccine or therapeutic. The announcement of a well-tolerated and effective treatment would likely spur a bull market in sentiment and boost economic growth expectations.

Questions remain as to the impact of COVID-19 on our communities and what it will ultimately mean for consumer spending patterns and corporate confidence/investment. These unknowns continue to make it a challenge to model the potential impact on corporate earnings over the coming quarters with any level of confidence and, by extension, what multiple of earnings investors should be willing to pay for stocks given this backdrop. In an environment of limited visibility around earnings levels and associated valuations, we believe investors are well-served to maintain long-term, strategic allocations to stocks and bonds rather than trying to make a “bet” with minimal confidence and supporting data. 

Treasury yields and equity market volatility are two variables we have consistently highlighted as worth monitoring for signs of a potential sustained rebound in stocks materializing. Volatility has subsided over recent months, the CBOE Volatility Index, or VIX, falling back into the mid-20’s from the 80’s, a level that exhibited investor fear and panic during the late March turmoil. Volatility moving lower often coincides with stocks moving higher, and the longer volatility remains subdued or perhaps stabilizes, the more confident market participants are likely to become and the more capital trend following and momentum investors are likely to throw into stocks, riding prices higher still.  

 

Treasury yields, on the other hand, have remained stubbornly low, failing to corroborate the rebound in equities and move lower in volatility. The yield on the 10-year U.S. Treasury bond staged a comeback in April and May as the re-opening trade took hold, bouncing to above a 0.90% yield for a brief time before trading back below 0.70% over the back half of June, as states scaled back re-opening plans. We would like to see the 2-year and 10-year U.S. Treasury yields move higher to indicate that expectations surrounding economic growth and inflation expectations are firming. The 2-year yield remaining below 0.20%, 0.11% to be precise, indicates that the Federal Open Market Committee (FOMC) isn’t expected to be able to raise the fed funds rate any time soon and that investor expectations for economic growth and inflation remain subdued.

For more current information from Regions Asset Management about coronavirus and current market events, please visit the following links:

Weekly Client Call Series

Client Election Event

Economic and Market Commentary

Business Continuity Planning and Preparedness

Understanding the CARES Act and How It Impacts You

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