The past week has been a wild ride for investors. The equity market gyrated in big swings for the entire week. The Federal Reserve’s emergency 50 basis-point reduction in interest rates to deal with the economic uncertainties associated with the impact of coronavirus was met with a wide range of reactions. I don’t believe lower rates will help in the short term to combat the challenges posed by the virus, as a coordinated global fiscal response would be a more effective approach to limit the economic impact. This needs to be associated with a commitment to provide ample liquidity for the unintended impacts of supply chain disruption and market volatility. Unfortunately, policymakers have not been able to agree on an approach or the need for this type of action. I have written in the past that markets dislike uncertainty more than negative news, and the growing wide-ranging impacts of behavior as a result of coronavirus create significant and unprecedented uncertainty.
The result has been U.S. Treasury yields dropping to record lows as a global flight to safety led to an insatiable bid for U.S. government bonds. The 10-year Treasury has now fallen below 1%, and dropped even further in the last two days to below 0.50% in the early hours of trading in Asia on Monday. The collapse in oil prices has also been unprecedented. Oil has fallen from $60/barrel at year end to around $30/barrel. The breakdown in the relationship between OPEC and Russia has prompted Saudi Arabia to cut prices and raise production.
Unfortunately, the probability of global policymakers and institutions making a mistake continues to grow, and the resulting fundamental impact for business and consumers continues to evolve. Like all crises, this will pass, but the biggest near-term concern is a liquidity crisis that further disrupts and dislocates the global system of economies and markets. In the end, staying disciplined with portfolio positioning and adhering to long-term goals with strong risk management are critical to success.
< Go to Monday Morning Perspectives
This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.