Bonds Rally as Investors Sell Stocks
Market Update and Advice

You wouldn’t know it from reading headline news, but the S&P 500 today closed up over half a percent compared to a week ago (2972 on Friday March 6 versus 2954.22 on Friday February 28). The takeaway: Our collective mood doesn’t always reflect reality. Meanwhile a record-breaking global bond rally accelerated on Friday, with growing fears over the economic impact of coronavirus sending investors scrambling for the safety of government debt at the fastest pace since the financial crisis of 2008.

Markets are driven by fear and greed. For the past two weeks we’ve seen investors react in fear to a global pandemic, a sharp economic slowdown, and the possibility of dire cascading effects on consumers and businesses, many of which hold substantial debt.

Central Banks are slashing interest rates at a rate not seen since the financial crisis of 2007-2009. But markets aren’t responding. Interest rates were already low. And rate cuts alone aren’t likely to solve the underlying problems.

The latest forecasts show GDP shrinking 2.5% in the first quarter. Central Banks are taking additional measures to contain the damage, including steps to ensure the financial system operates smoothly, credit is available, and furloughed workers receive subsidies. These measures are being implemented sporadically and as yet there is no clear direction on coordinated worldwide efforts. A more systematic application of these remedies could help markets stabilize.

Meanwhile, it is clear that fear rules the day. Ships held at sea, a high death rate in Seattle, the virus count rising, and uncertainty about the death rate worldwide all contribute to great uncertainty. The fact that undetected cases can’t be counted has created a whirlwind of rumor and speculation. 

At the same time, we have seen some reassuring news in South Korea, where widespread testing and tracking shows the death rate to be less than 1%. Virus experts point to the seasonality of epidemics, which raises hope for a slowdown in transmission with warmer weather, buying time to fortify defenses.

Keep in mind that gloom and capitulation (selling stocks into a decline) often pave the way to rebounds. We will surely see a rally when a vaccine is announced. We may see rallies when the spread of the virus slows, or containment efforts are seen to be working on a large scale. We may see a rally if the economy remains stable. Today’s healthy February jobs report, which normally would be cause for celebration, was met with a tepid market response. Bears say “Of course, the news is backward looking, and precedes the Coronavirus.” What if the economy does well again next month? For that matter, what if better news arrives on Monday, or Tuesday, or at the end of next week? The point is, bounce-backs can happen at any time during periods of volatility, but they can’t be predicted or timed.

I can’t say whether the next rebound will be V-shaped or U-shaped, and I can’t guess when it will happen. I will simply remind you of the importance of having an action plan that conforms to your priorities and risk tolerance. Now is the time to follow it. I encourage you to maintain perspective and focus on your goals. Don’t react emotionally. You need to be able to sleep at night, but you also want to capture the benefits of an upward market swing when it comes.

Do you have questions or concerns? Call me. I am here to help.