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