By Don Ames, Sarasota Family Office Association

The major equity indices all reached new all-time highs in February. But since then, concerns over the spread of the coronavirus around the globe has led to a plunge in bond yields as well as equities. As of March 6, the S&P 500 and Dow Jones Industrial Average have each slid about 12.50% from the all-time highs reached in mid-February. In a coordinated move with the major central banks around the world, the Federal Reserve cut its base rate by 50 basis points March 3.

The Fed next meets March 17-18 and it will be interesting to see if the Fed gives clues on both the timing and size of additional rate cuts.

Last Friday, February’s Nonfarm Payroll Report arrived showing strong growth. Payrolls jumped by 273,000, well ahead of the 165,000 jobs estimate. The U-3 unemployment rate declined a hair from 3.6% to 3.5%. The U-6 rate, a broader measure of the employment picture, also rose slightly, from 6.9% to 7%. The closely watched labor participation rate remained at 63.4%, its highest level in the Trump Presidency while wages grew by 3% from a year earlier.

OPEC and Russia concluded their meeting in Vienna without reaching agreement on production cuts on March 6. Russia reportedly wants to gain market share at the expense of US shale firms. As a result, many analysts fear a price war has begun. The impact could be immense as many industry analysts believe crude oil could drop to $30/barrel before bottoming. Relations between the US and Russia have soured as President Trump imposed sanctions on Rosneft, the Russian energy giant and the Nord Stream 2 natural gas pipeline. This pipeline was nearing completion just before the sanctions were imposed last month. It would pump an enormous amount of gas into Germany and much of western Europe.

The plunge in interest rates and oil prices could turn out to be quite beneficial for both American corporations and consumers. Corporate America will have the ability to refinance existing debt with lower yielding debt, improving its cash flow. In addition, the added cash flow should trigger a new wave of share buybacks, especially for companies with high yielding preferred and common shares. As a result, earnings per share will improve. Homeowners will seek to refinance their mortgages with lower rates improving their cash flow as well. Meanwhile, lower gasoline prices will provide additional cash flow for both consumers and businesses. A new leg up for equities in this record bull market may soon be underway!