The markets finally seemed to grasp the potential severity and negative impact to global growth of the COVID-19 virus – largely all in one day. Maybe it was also a bad Flash Services PMI (Flash U.S. Services Business Activity Index of 49.4) on Friday 2/21, the first contraction reading in four years. Maybe it was also Bernie’s convincing win in Nevada over the weekend – although I must point out that exactly 163,230 Americans (out of 44 million or so registered Democrats) have voted for the “presumptive nominee” so far in three states; hardly an overwhelming display of dominance despite the media speculation/concern. All of these likely played a role in some fashion to the pull-back that started on Friday.
We mentioned a few weeks back that corporate earnings growth, which since the middle of 2019 had continuously been pushed out, needed to finally materialize in Q1 and Q2 of 2020 for the rally to continue. While diagnosed cases and associated deaths seem to be decelerating in China, the spread of COVID-19 outside of China in places like South Korea, Italy and Iran suggest that a new round of infections could be just beginning leaving investors holding the bag for another quarter or two in terms of growth that hasn’t materialized. The market was right to be disappointed.
That said, there is a potential silver lining that could eventually serve to stop the bleeding in the near term. As US Treasury yields have fallen precipitously with US and non-US investors alike searching for safety in a suddenly uncertain world, the dividend yield on the S&P 500 has moved higher as stocks have fallen. According to Bespoke Investment Group, with the 30-year US Treasury trading at an all-time low yield of 1.82%, the spread between it and the S&P 500 dividend yield (1.94%) is also the highest in over a decade – at 0.12%. This is notable because this spread has consistently favored bonds over this time.
The market is a complicated animal and a single metric cannot capture the breadth and complexity of investor sentiment and behavior. That said, we think this metric is one to watch as the market seeks stability during a difficult time.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of February 2020 and are provided for informational purposes only. Investing involves risk, loss of principal is possible. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.
