Correction Redux

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

Exactly four weeks ago, the January Monthly Commentary included a discussion on corrections. In fact, equity markets were in the very early stages of what would become a minor correction of -3.7% for the S&P 500 Index. The following two weeks, the S&P 500 Index quietly pushed higher to set another all-time record high of 3393.52. Then three days ago another correction ensued. At this writing the correction low for the S&P 500 Index has been 3214.65, or -5.4%. Interestingly, the correction low one month ago was 3214.68. Some might call that a coincidence, but coincidences are rare in this business.

Without a doubt, the new coronavirus, now known as COVID-19, is the number one news topic. As such,  it has now become the pulse of the financial marketplace. When markets decline, news sources blame concerns about COVID-19. When markets rise, news sources credit decreased concerns about COVID-19. It’s the easy answer. Of course, in reality financial markets continue to reflect the underlying strengths and weaknesses of global, national, and regional economies. So when you step away from the headlines and take a look at the big picture, what appears? Global, national and regional economies that are growing and expanding and supporting the positive financial numbers that are being posted.

The ‘coincidental’ identical lows for the S&P 500 Index referenced in the first paragraph may be the harbinger of a new trading range for equity markets. Granted, not all of the domestic indexes are going to mirror the S&P 500, and we are very fresh into the current correction. But a trading range could be a healthy way to work off the over-bought market conditions that have developed over the past five months. The long-term trend for domestic equities is intact. Say what you will about this old bull market, it has demonstrated that it is tough and steady and not done yet.    

The negative impact of COVID-19 on global equity markets is a developing story. European equity markets have been rising hand-in-hand with U.S. equity markets, and Brexit is fully underway. European bond markets are still under the influence of the negative interest rate experiment. But, politically and geographically, their borders are open. Containment could be more complicated. China is pulling emerging markets around by the ear. It remains to be seen what kind of impact their respective economies will realize.

Back in the U.S., bond markets are taking full advantage of equity market volatility. As may be expected, U.S. Government Bond Indexes are strong across the board, just as they were a month ago. The exceptionally sharp declines being seen in equity markets today have punched U.S. Government Bonds up and out of a trading range that has been containing prices since last August. It will be interesting to see if this is a false breakout, or if yields can actually go even lower. The yield on the 30-year U.S. Treasury Bond is currently 1.90%. The 20-year is 1.75%, and the 10-year is 1.46%. How low can we go?

Today’s equity market declines were definitely aided by algo-trading programs. Accordingly, it would be logical to expect exaggerations in direction. That does not negate the impact of the declines nor the desire of institutional investors to ‘blow off some steam’ and move into a rebalancing mode. COVID-19 has effectively shifted attention away from the impeachment proceedings, which have quickly gone cold. The upcoming elections arepatiently waiting in the wings, with plenty of fireworks in store. Market volatility has demonstrated that it, too, is alive and well. It should be a very interesting year!

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.