Joel’s Weekly Talking Points – 1/27/20

1. Coronavirus: Markets appear to be selling off today due to concerns over the spread of the Coronavirus outbreak.  Most of the known cases are in China, specifically the Wuhan province but the virus is quickly spreading.  The major concern at this point is disruption of global supply chains due to the severe travel restrictions that China has implemented in an attempt to control the spread of the illness.  This is raising comparisons to the SARS outbreak in China circa 2002-2003.  The good news is that this new virus appears to be less lethal than SARS – the bad news is the Coronavirus seems to be far more communicable.  In 2002-2003 the SARS outbreak caused a slowdown in Chinese GDP of 1-2% and the fear is they would be in for a repeat of that.
2. Home Sales: Existing home sales increased 3.6% in December and were up 10.8% year over year.  The median home price rose to $274,500 – an increase of 7.8% from 2018.
3. Manufacturing: Global Manufacturing activity may be close to bottoming according to the HIS Markit’s preliminary purchasing managers index.  Global Manufacturing has been in contraction for months, leading some to be concerned about a global recession, but the rate of contraction is beginning to slow, particularly in Japan, the U.K., and Europe.
4. The FED: The FED will meet this Wednesday and it’s wildly expected that they will hold rates steady. There is a very small chance in my opinion that the FED will cut in response to a possible Coronavirus slowdown, but it’s not likely.  The inflation rate is where the FED wants it to be, the US is still creating jobs, and there is still little evidence of a recession in the economic numbers.
5. Fun fact of the week: 10/20/30 – The Treasury Department announced on 1/16/20 that it will begin selling 20-year bonds before 6/30/20, a reintroduction of a debt instrument last used in March 1986. The 20-year Treasury bonds will be an addition to the existing quarterly auctions of 10-year notes and 30-year bonds (source: Treasury Department).

Weekly index performance: The S&P was down 1.01% last week, the Russell 1000 Growth index was down 0.74% and the Russell 1000 Value was also down 1.23%. Small caps followed suit with the Russell 2000 losing 2.19%. International markets were down with the EAFE losing 0.61%, and Emerging markets down 2.39%. Turning to fixed income, the broad market US Aggregate was up 0.79%, and the High Yield index was down 0.42% last week.  The US 10 year is at 1.75% this morning.

Bottom line:  With nearly 36.7% of the S&P 500 reporting earnings this week, I hope that the market will refocus on fundamentals rather than fear from a possible pandemic or geopolitical risks.  According to JP Morgan, 81 companies have reported so far and earnings growth is up 12.7% from the previous year.  They do not expect that to continue for all of 2020 but it may just be what the market needs to hear right now with all of the other “noise” out there.

Any opinions are those of Joel Faircloth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

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Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and lower forecasted growth values.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations.

The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index’s three largest industries are materials, energy, and banks.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase.  The index includes both corporate and non-corporate sectors.  The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations.