Markets remain volatile on coronavirus uncertainty. Despite a strong day for the S&P 500 Index yesterday on stimulus prospects and greater election clarity, we expect market volatility to continue. The overnight news cycle pulled S&P 500 futures meaningfully lower as containment efforts intensified. Until we have a clearer picture of the course of the virus, market volatility will likely persist and any market recovery is more likely to be a process than a rapid reversal.
U.S. services sector expansion points to economic resilience. The Institute for Supply Management’s Non-manufacturing Purchasing Managers’ Index (PMI) for February surprised strongly to the upside, coming in at 57.3 versus consensus expectations of 54.8, a one-year high, while new orders rose sharply. The strong reading contributed to Citigroup’s U.S. Economic Surprise Index, an average of key economic data compared to expectations, to rise to levels not seen since early 2018. While we know the economic impact of the coronavirus will become increasingly apparent, the U.S. economy has been holding steady heading into the period of uncertainty.
Treasury yield retreat approaches largest of cycle. The 10-year Treasury yield has now declined 2.25% since hitting 3.24% in November 2018, its second-largest decline of the cycle without a major reversal. In 2011 and 2012, interest rates had fallen 2.32%. Declines have narrowed the still meaningful yield gap with international bonds and made valuations increasingly expensive. For more discussion of what recent declines may mean for bond investors, see the LPL Research blog, to be posted later today.
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