The scale and speed of the recent U.S. stock market losses were stunning. The Dow Jones Industrial Average plunged 3,583 points, or 12%, last week, capped by a 357-point drop on Friday. It was the steepest weekly percentage decline since the financial crisis. The index now stands 14% below its all-time high of 29,551 set on Feb. 12. The S&P 500 index has declined 13%, to 2,954 from its Feb. 19 peak of 3,386, and the Nasdaq Composite is down 13%, to 8,567.
The old saw is that the one thing Wall Street hates more than anything is uncertainty, and that is true now. The coronavirus impact on the economy and profits is difficult to quantify, and investors fear the worst.
Treasury yields fell sharply, with the 10-year note ending the week at a record low of 1.17%. Muni bond yields are even lower, as risk-averse investors pile into the hot tax-exempt market. The double-A-rated Los Angeles International Airport sold $738 million of bonds last week at a range of just 0.63% for a one-year maturity to 1.44% in 20 years.
Cracks are appearing in the junk-bond market, with the yield spread relative to Treasuries widening by a percentage point. The average junk yield is still less than 6%, but yields in the 10% to 15% range are common in battered energy-sector bonds from leveraged companies like Range Resources (ticker: RRC), Southwestern Energy (SWN), EQT (EQT), and Diamond Offshore Drilling (DO).
Treasury bonds hold little appeal relative to stocks and inflation, now running at more than 2%, Berkshire Hathaway CEO Warren Buffett said on CNBC last week. Fearful equity investors, however, are taking little comfort from that relationship out of concern that earnings could crater.
Buffett was also unfazed by the coronavirus, saying on Monday, “It makes no difference in our investments. There’s always going to be some news, good or bad, every day. If somebody came and told me that the global growth rate was going to be down 1% instead of 1/10th of a percent, I’d still buy stocks if I liked the price, and I like the prices better today than I liked them last Friday.” He may like them even better now.
He compared the 10-year Treasury to a stock “trading for 70 times earnings that can’t increase its earnings for 10 years.” This calculation involves taking the inverse of the 10-year yield, then 1.4%. The effective price/earnings ratio on the Treasury is up to 85 now, with the yield down at 1.2%. The earnings yield on stocks—the inverse of the P/E ratio, is more than 5%.