Stock Slump Resets Soaring Prices

Posted on March 13th, 2020

Equity Market Pullback

February saw stock valuations retreat to their levels around the middle of last year as concerns around the new coronavirus disease (COVID-19) grew. Some analysts believe that the pullback has helped identify several overvalued stocks. Valuations are considered to be more in line with historical standards relative to where they were at the beginning of the year.

The final week of February saw all equity indices fall substantially. The S&P 500 Index slumped 11.49%, the Dow Jones Industrial Index fell 13.6%, and the tech-heavy Nasdaq Index gave up 10.54%.

The pullback among all major equity indices has been one of the fiercest in market history, but may yet be a good thing in helping to reign in valuations that were considered too high by many analysts. Fortunately, the stellar performance of the equity markets in 2019 is serving as a buffer for the dramatic pullback.

U.S. corporate earnings for a host of companies in various sectors are estimated to be revised downward following the review of sales and inventory figures.

Bond Yields Plummet

In bond markets, treasury yields traded at record low levels, driven by global investors seeking safe haven assets. All Treasury maturities yielded well below 2% by the end of February, lower than the Fed’s inflation target of 2%. The dramatic drop in yields brought the 10-year Treasury bond yield to 1.13 % at the end of February, the lowest yield for the 10-year Treasury on record.

When U.S. equity markets fell in 2003 during the SARS outbreak, rates were much higher, with the 10-year Treasury yielding over 3.5%. The yield on the 10-year Treasury on Feb 28th at 1.13% is lower than the current S&P 500 Index yield for stock dividends at 1.97% on Feb 28th. Analysts view the yield difference as a benefit for stocks for yield seeking investors.

The Federal Reserve reduced the Fed Funds rate, a key monetary tool rate, following a rare emergency meeting. The rate reduction was made with hopes of stemming market uncertainty and shoring up liquidity for extended periods of volatility. The announcement triggered a further drop in bond yields across various bond sectors.

Sources: S&P, Dow Jones, Nasdaq, Bloomberg, U.S. Treasury