U.S. Dollar Rises

With the economic turmoil from the COVID-19 virus, the U.S. dollar rose again. During economic uncertainty, the dollar gains value as investors seek stability, and the U.S. dollar is generally regarded as one of the safest, if not the safest, currencies in the world. For the week, the dollar is up about 3 percent against a basket of other currencies. Surprisingly, the dollar is also up against the Japanese yen, which is also regarded as a safe haven currency.

COVID-19 To Hit Bonds

We're sure by now that you have seen the dramatic volatility in the stock market, along with the precipitous drop. But the recent economic slowdown caused by COVID-19 will officially hit the bond market soon. Moody's announced that it was undertaking a global review of bond ratings, with a mass of downgrade or downgrade warnings coming in the next several weeks. The review of airlines, cruise ship companies, and oil companies has already begun. About 9 percent of the companies Moody's reviews in Europe have significant exposure, and another 54 percent have moderate exposure. About 16 percent of the North American companies rated are at high risk of a ratings downgrade.

Smart Money Versus Dumb Money

The growth of passive investing, that is, investing in index funds, has arisen in large part due to the growing popularity of the efficient market hypothesis. In short, it seems that outperforming the stock market is a difficult, if not impossible, task. As a result, retail investors, sometimes referred to as dumb money, have flocked to index funds. A common belief on Wall Street is that in a severe market downturn, retail investors would flee the market. The 30 percent drop in the market over the past month has been a severe downturn. But, when fund flows, which is the amount of money put into or pulled out of an investment, is examined, the two S&P 500 Index ETFs favored by individuals showed net buying, while the ETF preferred by professionals showed net selling. In other words, the professionals ran and mom and pop actually bought more. With the market up about 5 percent for today, maybe dumb money does know a little more than previously believed.

Free Connect Offer From McGraw-Hill

For all those students and Professors impacted by the COVID-19 virus and moving to online instruction, McGraw-Hill is offering free access to Connect for the remainder of the spring semester. The access includes all questions and problems in Connect, as well as the ability to record and upload video lectures to the website. For Professors, you can even download a report that details which videos were watched by which students and the time spent watching videos. McGraw-Hill is offering support and webinars for those wishing to take advantage of this offer. You can find more information here.

Yield Curve Inverts

In the textbook, we discussed a normal, or upward sloping, term structure, and an inverted, or downward sloping, term structure. The U.S. Treasury yield curve inverted again on Monday, after inverting at the end of January and in March 2019. An inverted yield curve has preceded the last seven U.S. recessions. However, several analysts are not convinced a recession will result from this inversion. U.S. Treasuries are regarded as a safe haven investment. Given economic issues around the world, the low 10-year yield may be driven by the demand for this bond, not U.S. economic conditions. Here is a question for you: Notice in the first sentence (and in the textbook), we discuss the term structure, but then change to the yield curve. What is the difference between the term structure and a yield curve?

Cash Balances Increase

The old expression "cash is king" is often followed by corporate treasurers, especially when the economic outlook is uncertain. In the 2019 Cash Management Survey, 42 percent of companies increased cash balances, while only 22 percent reduced cash. Additionally, 62 percent of companies are net investors, with only 38 percent are net borrowers, another indication of a fight to cash. One significant issue found in the survey was that more companies experienced a decrease in operating cash flow during 2019 compared to 2018, an indication of why corporate treasurers are becoming more conservative.

FX Hurts North American Profits

According to a recent report, currency exchange fluctuations reduced North American corporate profits by $11.55 billion in the third quarter of 2019. The loss amounts to an average reduction of $.03 in EPS. The euro was the currency which caused the most losses, affecting about 46 percent of companies. The British pound, Argentine peso, the Australian dollar, and Chinese yuan were next on the list of most impactful currencies.