- Total long-term flows continued to be positive for the two weeks ended February 19, enjoying an overall strong start to the year. Flows have been positive for the past six weeks now. As usual, total bond inflows were stronger than equity outflows.
- Equities experienced more than $6 billion in withdrawals due to domestic negative flows, including large-cap and multi-cap. The $10 billion in outflows were offset by positive flows in the rest of the world.
- Meanwhile, bonds enjoyed nearly $22 billion in inflows thanks to strong investment grade, multisector and municipal bond mutual funds.
- The positive picture in flows was in contrast to the panic in global markets, as the coronavirus threat reached European shores and appears unlikely to abate anytime soon. Italy is the most hit country in Europe, while China, Iran and South Korea have reported the most cases in the world. So far, the virus has infected 90,000 people worldwide and killed more than 3,000.
- Federal Reserve officials believe the current monetary policy stance is appropriate, signaling that interest rates will stay at the current low level for a while. However, if the coronavirus threat hits trade and the economy, the Fed is likely to cut interest rates in order to boost the economy. The Fed warned of possible dangers related to the coronavirus, although the issue was in its infancy at the time of the policymakers’ meeting.
- The European Central Bank was cautiously optimistic about the eurozone’s growth outlook before the coronavirus fears hit. It said data suggested that Europe’s economy was recovering, although it noted that global trade remained subdued due to trade tensions between China and the U.S.
- The sentiment in the German manufacturing sector improved substantially in February, although it remains in contraction territory at 47.8. The German flash manufacturing purchasing managers’ index posted its best result in more than a year. Next month the impact of the coronavirus will be baked into the figure.
- For a better indicator of how the coronavirus could hit sentiment in the manufacturing and services sector, China offers an example. The Chinese manufacturing PMI tumbled to 35.7 in February, from 50 in the prior month, and is well below analyst expectations of 45.1. The non-manufacturing PMI’s drop was even worse, at 29.6 from 54.1. Analysts had expected a drop to 51.4.
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- As expected, the broad indices have declined abruptly over the past two weeks, with most of them posting two-digit drops. Meanwhile, bonds posted positive performance, as they benefited from their safe-haven status.
- Vanguard’s S&P 500 index fund (VFINX) lost 12.53% of its value over the past two weeks, becoming the worst performer from the pack.
- At the same time, Vanguard’s total bond market index fund (VBMFX) gained 1.78%, the best performer. The fund recorded the weakest performance last time.
- Sectors were all down, with only one managing to post single-digit losses.
- Vanguard’s financial sector fund (VFAIX) was hit the hardest, losing 14.65% of its value over the past two weeks.
- Fidelity’s real estate sector fund (FRIFX) is again the best performer from the pack, although this time with a loss of 4.49%.
- Foreign funds were all down, but not as much as U.S. equities.
- Chinese equities fund (MICDX) was the surprising best performer from the bunch with a fall of 2.65%. The fund outperformed for the second consecutive time.
- T. Rowe’s Latin America fund (RLAIX) shed 10.95% of its value and became the worst performer from the pack.
Major Asset Classes
- In major asset classes, the picture was decidedly more mixed than elsewhere. Five assets posted positive performance, with the rest coming in negative.
- PIMCO’s long-term bonds fund (PEDIX) outperformed the pack by far, advancing 9.82%, as investors plowed their money into safe-haven assets.
- Vanguard’s broad market-cap fund (VFINX) was the worst performer here as well, tumbling 12.53%.
The Bottom Line
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