The U.S. market continues its massive risk-off move Thursday, as the coronavirus’ impact is wide ranging across sectors.
All three major U.S. indexes fell considerably Thursday, with the S&P 500 falling 3.23%. The 10-year treasury yield hit an all-time low of 0.914%, as investors continue to rush back into safe assets.
Wednesday, California declared a state of emergency over the spread of the virus into the state. The magnitude of the economic impact of the virus continues to be an unknown. Markets loath uncertainty.
The seemingly premature 50 basis point interest rate cut from the Federal Reserve, along with cuts of the same magnitude around the globe, are making investors queasy at the possibility that central bankers see the virus causing recessions in many economies.
Plus, some are worried that low rates won’t trigger investment when the virus is eradicated, as rates are already historically so low. Of course, low rates make stocks more attractive and equity prices currently reflect a large premium potential return over safe assets, serving as a positive driving money back into stocks on some days of late.
Importantly, the magnitude of each market movement has been considerable of late. Good days see stocks rise 3% or 4% and bad days see the same magnitude. The volatility index, which historically hours around 15 or below, is still at 39.
Unlike the trade war, which is currently abating and also out of focus, the coronavirus impacts everything. With tariffs, a rather defensive consumer staples company in the U.S. could raise prices in order to protect profit margins when higher import costs threatened to pinch margins. Consumers still need to buy their groceries and toiletries, so marginal price hikes weren’t too burdensome.
The result: the virus impacts all stocks, which bruises the market, especially since each stock isn’t exactly moving down marginally.
“We’re trying to reprice every stock,” JJ Kinihan, chief market strategist for TD Ameritrade told TheStreet. "We had what happened with tariffs. People were trying to price things based on that. That affected some stocks. This [the virus] affects every single stock in the market based on how bad the virus gets.”
Notably, the Invesco S&P Utilities ETF is indeed up 8% for the year because of its companies’ high dividend yields, which serve as a “bond proxy.” But the Invesco S&P consumer staples ETF had fallen 6% for the year during the throws of last week’s correction and is only up q.76% for the year now. Those companies, too, offer strong dividend yields compared to treasury yields.
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