Covington Investment Advisors, Inc. Blog
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Federal Reserve Action and Market Volatility In late March the Federal Reserve established the SMCCF (Secondary Market Corporate Credit Facility) to support credit to employers and provide liquidity for financial markets. These new credit facilities gave the Federal Reserve the ability to purchase a larger array of financial products than traditional quantitative easing techniques previously allowed. This included the ability to purchase large amounts of investment grade corporate bonds through SPVs (Special Purpose Vehicles). As shown in the chart above, this action by the central bank had a profound impact on the financial markets. In particular, the creation of these credit facilities caused a peak in volatility in both equity and credit markets. The long-term impacts of the unprecedented monetary actions will remain to be foreseen. But for now, the Federal Reserve has been able to keep financial markets operating relatively calmly while the world navigates the Coronavirus pandemic. ...
One central part of our investment philosophy that we constantly preach is owning companies that have strong balance sheets. What this means is that they have limited liabilities including debt on their balance sheets as well as low working capital requirements. We also look for those companies that have large amounts of cash on their balance sheets. When these strong balance sheets are paired with good capital allocating management teams future returns tend to be strong in both up and down markets. Goldman Sachs recently created “strong balance sheet” and “week balance sheet” baskets of stocks with the former outperforming the latter.
The recent outbreak of the Wuhan Coronavirus is a topic that is at the forefront of all investors’ minds, particularly since information out of China is spotty and the numbers that are supplied by the Chinese government need to be met with high scrutiny. Many would wonder how the world’s second largest economy seemingly grinding to a halt would not cause a market sell off. The market reaction thus far has been relatively muted for several reasons: The first reason is the derivative effects of the virus that the market is currently pricing in. The market is confident that China will be able to relatively contain the virus before it becomes a full-on Global Pandemic. From what we know now, the mortality rate from Coronavirus is relatively low. Figure 1, located below, plots the Coronavirus mortality statistics against similar outbreaks. As this is being written, only two deaths have been...
One part of the financial industry that has eaten up a disproportionate amount of headlines in the last few years are IPOs and private equity. Seemingly every week a new, fast growing company makes its debut on the public markets with some having eye-popping share price movements in the market. It’s important to be aware of these companies and the private equity industry as a whole because they do have a ripple effect across the business landscape. A term that may be heard in tandem with IPOs or venture capital is “Unicorn”. A Unicorn is a private company that is valued at over $1 Billion. A common theme amongst most of these high flying “Unicorns” is that they are fueled by debt and low interest rates. Interest rates are near their historical lows with the ten year government bond yielding sub 2%. Historically, interest rates tend to mean...
Tariffs have been at the forefront of economic headlines over the past year. If the market headlines do not include “United States Threatens to Impose New Tariffs” then it most likely includes “Markets rise on the hope of a Trade Deal”. This has been the never ending cycle for the last year. On May 10th, 2019 the Trump Administration announced that a 25% tariff would be placed on an additional $250 Billion worth of Chinese goods being imported to the US. This tariff levying once again shocked markets and sent them trading lower the following week. Although we follow these developments daily it is important to understand the impact that this political risk has on your investments. Measuring The Effects Of The Trade War Trade tensions, specifically tariffs, affect the economy and market in a number of different ways. Certain aspects of a ‘Trade War’ are relatively easy to quantify...
The S&P 500 telecommunication sector is getting a new look. For years, the telecom sector has been one of the smallest sectors in the S&P and dominated by two names; Verizon and AT&T. This fall, the telecom sector will be replaced with a new sector labeled as the ‘Communication Services Sector’. As the name implies, the new sector will be more geared towards the way that media is now delivered to customers such as streaming and downloads. Morgan Stanley Capital International, typically abbreviated MSCI, summarized the new sector on their website: “The last several years have seen an evolution in the way we communicate and access entertainment content and other information. This evolution is a result of integration between telecommunications, media, and internet companies. Companies have further moved in this direction by consolidating through mergers and acquisitions and many now offer bundled services such as cable, internet services, and telephone...