Stock markets around the world have continued to flash troublesome signs in recent weeks, while some of the traditional “risk-off” assets like long-term bonds and gold have been doing very well.
Long-term treasury bond yields continue to decrease, with the 10-year yield down to 1.38% and the 30-year yield down to 1.87%. Investors are piling into bonds and have driven the whole yield curve below the current inflation rate. The yield curve is once again significantly inverted, and the market is pricing in a high probability that the Federal Reserve will cut interest rates again this year. I noted last week that the G Fund now pays below the inflation rate.
Gold is at all-time highs in most currencies, and at 7-year highs in dollars:
Coronavirus headlines are taking most of the frontpage news today. In addition to China continuing to be largely shut down economically, affecting supply chains around the world, there has been notable spreading of the virus in Italy, South Korea, and certain other countries, prompting shutdown responses from their governments in heavily-affected areas.
Many American companies, ranging from Apple to Hasbro, have reported problems with their supply chains due to their sizable reliance on Chinese manufacturing and logistics.
On Monday, the C Fund and the S Fund started the morning both down over 2%, and the I Fund down over 3%. Travel stocks and semiconductor stocks have been some of the hardest-hit areas, while real estate, utilities, and healthcare have largely held up better.
A particular datapoint that rattled markets last week was the composite purchasing manager’s index for February, which came in just below 50, indicating contraction:
The composite PMI is a very broad-based survey of activity, including the manufacturing and services sectors. It’s also one of the fastest indicators; most data points are given to us a month or a full quarter in hindsight, while PMIs are more like a real-time snapshot, which is useful.
However, PMIs can be very “noisy”, with big up and down swings as the above chart shows. It could just as easily surprise to the upside next month, or hit us with a far lower number due to ongoing coronavirus impacts.
While the virus itself has officially infected and killed far fewer people than the seasonal flu, it’s the government responses to try to contain its spread that are impacting global markets more than the seasonal flu ever does. People are working less, traveling less, and using fewer commodities in a number of countries now.
SARS in 2003, for example, killed far fewer people than the seasonal flu, but this was largely thanks to successful efforts by Hong Kong authorities to swiftly contain it.
Overall, this is certainly an environment where a diversified portfolio is prudent for most investors. A combination of stocks and bonds historically helps to cushion the blow from market turmoil.
In addition, TSP investors can always use outside accounts, such as IRAs, to further diversity into alternative asset classes that the TSP doesn’t offer, like real estate investment trusts, precious metals, or specific stock sectors.