Published January 24, 2020
One of the oddities of the market so far in 2020 is the decline in interest rates. After rising in the latter half of 2019, interest rates appear to have rolled over and begun heading back down over the past month. While that’s not long enough to declare a trend, the behavior of interest rate sensitive sectors tells us that this is a significant shift. Below we show the 10-year U.S. Treasury rate, its inability to get above 2.0%, and subsequent slide over the past month (green arrow on the right).
This declining interest rate environment since October 2018 has had a significant impact on stocks. The interest rate sensitive utility and real estate sectors have provided almost double the performance of the broad market S&P 500 over the past two years (5-year interest rates are shown in the lower pane of the chart below).
Inflation remains stubbornly low and investors hold on to enough caution to keep bond and bond proxies like utilities a surprisingly solid investment. Investors are still not throwing caution completely to the wind!
Stocks finally found something to worry about this week. Coming back from Monday’s holiday, investors nudged down stock markets Tuesday on news from China of a rapidly spreading virus. The S&P 500 slipped -0.3% on the news. A surprisingly strong earnings report from IBM pushed stocks higher at the open Wednesday. However, investors sold throughout the day to leave markets unchanged. Further bad news out of China sent stocks lower early Thursday. However, this time, investors bought shares throughout the day to bring indexes back to a slight positive finish; interest rates ticked lower, continuing a recent trend (see below article). Strong earnings from Intel (INTC) and American Express (AXP) combined with a hopeful manufacturing report out of Germany to support stocks Friday. Yet, the increasing concerns about the spread of China’s coronavirus, and its possible impact on the global economy, more than offset the good news. Stocks slid more than -1% at their worst levels of the day before closing just a touch better than that.
Stocks finally encountered some selling with investors pulling back this week to leave the S&P 500 (SPY) lower by -0.97%. The market-leading Nasdaq 100 (QQQ) only dipped -0.32% for the week. Oddly, small-cap shares, which would seemingly be less affected by events overseas, succumbed to greater pressure with the Russell 2000 (IWM) -2.21% in a reversal of the prior week’s gain.
Warm wishes and until next week.