|10-Yr UST began the month with a 1.52% yield and finished February at a yield of 1.14%.|
As February ended, the Dow Jones Industrial Average had its worst week since the Financial Crisis, and the S&P 500 Index sunk by more than 11% into correction territory. An estimated $7 trillion in market value was wiped out before the selloff slowed and the market partially rebounded the following week.* Meanwhile, government bond yields also fell to record lows as the selloff prompted a flight to quality in the bond market. As March began, the yield on the 10-Year Treasury rate was less than 1%, which forced the Federal Reserve to deliver an emergency cut that dropped their benchmark short-term rate to a range of 1.00 and 1.25%.**
This kind of chaos was typical of financial markets around the world in late February, as fears mounted that the coronavirus might grow into a global pandemic. Before all this, the U.S. stock market had been experiencing a blow-off top rally, which saw it hit multiple new record highs since late October 2019. With the Fed and President Trump clearly committed to keeping the rally going, 2020 looked like it might be another strong year for Wall Street—despite the fact that GDP growth has been consistently below the Trump administration’s 3 to 4% target, and is forecast to shrink further this year.*** So, will the coronavirus issue put an end to the blow-off top rally for good, and could it be the tipping point that triggers the long-overdue third major sustained correction of what I believe is this long-term secular bear market cycle?
Obviously, we don’t know the answers yet. However, it is worth noting that the tipping point for almost every major sustained correction throughout history has been something completely unpredictable—like the coronavirus. The issue also has other characteristics common to previous tipping points, such as being a humanitarian crisis with the potential to do great damage to the global economy, and the fact that it’s constantly in the news. Does all this mean the stock market will continue getting whipsawed by thousand-point swings as it did the last week of February? Or could it mean that the long-overdue third major sustained correction of what I believe our current long-term bear market cycle may finally take hold, leading to a drop of between 40 and 70%?
Again, it’s still too early to tell. However, for investors in or nearing retirement, I believe there has never been a more crucial time to maintain (or possibly even increase) your strategic focus on asset protection and retirement income!
When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
- Pay Me Now – Enhancing current yield
- Pay Me Later – Enhancing yield to worst
- Cover My Assets I. – Managing interest rate risk
- Cover My Assets II. – Managing default risk
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.
There were no swaps for the month of February.
*“Dow Jumps 1,290 Points in Biggest Point Gain Ever,” Yahoo Finance, March 2, 2020
**“Fed Cuts Rates by 50 Basis Points Amid Coronavirus Concerns,” Yahoo Finance, March 3, 2020
***“U.S. Economic Outlook for 2020 and Beyond,” The Balance, March 3, 2020
Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
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