January 24th, 2020
Investors Ward Off Coronavirus
- Contagion Fears Yet to Go Viral
- Early Earnings Trends
- Economy Continues Growing
- Looking Ahead
With a week still to go, January has already delivered a year’s worth of worries, from Iran to the impeachment process, to Brexit and a new, deadly viral outbreak in China.
Despite the scary headlines, U.S. stocks have gained ground (even after the week’s decline) and are not far below the all-time highs set at mid-month. For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 2.3% and 3.0%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is flat at 0.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dropped to 2.19% from 2.31% at 2019’s end. On a total return basis, the U.S. bond market has gained 1.0% for the year.
You may be surprised by those returns, but they demonstrate why we believe that investment decisions should not be dictated by emotions. We strongly encourage you to stay diversified and focused on your investment goals, not the day-to-day headlines.
Contagion Fears Yet to Go Viral
After being the focus of a trade dispute with the U.S., China has returned to the headlines for another reason—as ground zero for the coronavirus, which has claimed 26 victims and infected nearly 900 people at last report. The virus originated in the central Chinese city of Wuhan—which counts 11 million residents and has been quarantined and cordoned off by military force. China’s unprecedented lockdown of Wuhan and two other cities, with restrictions on five others thus far, suggests to us that the magnitude of the virus’ spread and impact is greater than being reported (as is often the case with negative news from China).
If the current outbreak worsens, the question will be how far the contagion and resulting humanitarian crisis might grow. The farther the virus spreads, the greater the potential disruption to day-to-day life in China and beyond, and thus for traders to react with fear. Like all other known risks, we will be watching this closely.
While we are obviously concerned by the human toll, from an investment standpoint, the market impact so far has been restricted primarily to Asian bourses. And so far, the reaction has been modest—Chinese stocks are only down 3% or so this month.
Early Earnings Trends
It’s still early, but familiar trends have defined the earnings reports from the nearly 75 companies that have announced fourth-quarter results so far. Companies catering to U.S. consumers are faring well, while firms dependent on U.S. manufacturing and global business remain hamstrung by U.S.-China trade concerns. The impact of the recently signed “phase one” truce between the two super-economies could spur greater business spending, though any such boost will not factor into fourth-quarter results.
Thus far, almost 70% of earnings reports have delivered results that exceeded admittedly low expectations. But in this market, doing “better” is more important than doing “good.”
Economy Continues Growing
Recent U.S. economic data has been decidedly mixed. In past weeks, we showed you how the larger service economy is growing even as the industrial or manufacturing segment has been slowing. You can also see this mixed data in the Conference Board’s Leading Economic Index (LEI)—a measure of 10 different factors that tend to drive the broader economy. The most recent release showed a worsening trend for three of those 10 factors and a stable track for five.
Our view, and we’ve been saying it for years: We have a slow-growth, not no-growth economy. But if the alternative is a recession, we’ll take slow and steady any time.
Looking Ahead
Next week’s earnings and economic reports could offset headline fears. In addition to a flood of fourth-quarter earnings and outlooks from corporate leaders, we’ll get home-related data (prices, sales and pending sales); a first look at Q4 economic growth; durable goods orders; consumer gauges including confidence, sentiment, income, spending and savings; inflation measures; and a two-day Federal Reserve meeting culminating in Chair Jerome Powell’s Wednesday afternoon press conference.
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