The month of February closed out in a flurry of turbulent trading. Last Monday, the market had recovered all but 3.3% of its January 26th peak, but on Tuesday that changed. In a break from past Federal Reserve Bank Chairs, Jerome Powell’s comments were uncharacteristically clear and frank, including his perspective on the current rate of domestic inflation. This sparked fears among investors that the assumed number of Fed rate hikes may be too conservative; this produced selling pressure in the interest-rate-sensitive sectors of the market. While still digesting the implications of Chairman Powell’s comments, investors were hit Thursday with the announcement that the Administration may pursue significant tariffs against foreign steel and aluminum producers. Fear of a potential trade war roiled the market, as investors quickly assessed the list of likely targets of retaliation. The sell-off broadened from the earlier interest-rate-sensitive issues to industrial, agricultural and consumer shares with significant global exposure. By Thursday’s close, the market was back to a 6.8% decline from the January high.
By Friday’s close, the materials sector had lost 3.8% for the week, followed by the industrial sector’s 3.3% decline. Apart from information technology, which suffered a loss of just 0.9%, the balance of the market settled around a 2.7% loss for the week. Commodity prices varied widely, with grain prices adding up to 8.0% as speculators moved to lock up supply in advance of potential retaliatory responses to the Administration’s announcement on steel and aluminum tariffs. Energy prices diverged as well, as the price of crude oil fell 3.6%, and the price for domestic natural gas climbed 2.7%. Once again, last week we witnessed a distinct capitalization bias among domestic equities, as the Russell 2000® Index surrendered 1.03% to the S&P 500® Index’s 1.98% loss. Internationally, the MSCI EAFE® and Emerging Market indices both lost 2.9% last week.
It is easy to become fixated on the headlines of the day and to fall prey to the negativity that pays for commercial news. It helps to take a step back and look at the broad picture for a better sense of where we stand. This perspective helps to make calm, balanced decisions. To that end, I offer an update of the global interest rate environment. Presented below are the prevailing yields on ten-year maturity sovereign debt from around the world. The current yield on U.S. ten-year puts us between Australia and New Zealand, still roughly 200 basis points above the likes of Germany and France. Nothing happens in a vacuum; U.S. Treasury debt is still the ‘go-to’ for safety and liquidity. Fears of runaway interest rates in the U.S. are wildly overblown, as are the concerns of a trade war. The reality is that Europe and Asia cannot afford to lose access to the U.S. market. As the U.S. population ages, we continue to shift toward a service-based economy. Of course, global trade is important, but unlike Germany, Japan and China, our economy is not built on it.
Source: All statistics herein obtained from Bloomberg.
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