Joel’s Weekly Talking Points – 2/10/20
- Coronavirus: Still challenging markets. We are about 75% through earnings season and for S&P 500 stocks, earnings are up about 4% year over year. Coronavirus has now killed more people than SARS did 18 years ago, but the mortality rate is far lower – it’s just more people are catching it. The one thing that has surprised me through this, and bears watching, is the world reaction. We have folks of Asian descent being quarantined in Europe and the US, we have vacationers stuck on a cruise ship off of Italy – this didn’t happen with SARS. Maybe it’s a good thing that governments are trying to slow down or stop the spread, but there is a risk that if the virus mutates and continues to spread that there will be an economic reckoning.
- Jobs: The US added another 225,000 jobs in January, beating the consensus number of 165,000. Unemployment ticked up to 3.6% as more people are entering the work force or looking for work. Most importantly – average hourly earnings were up 0.2% for the month and are now up 3.1% year over year. This may have been the reason equity markets didn’t rise with the news – if wage growth accelerates if may force the FED to raise rates sooner than it wants to. We are not there yet, not by a long-shot in my opinion, but this also bears watching.
- Manufacturing: I wrote a couple weeks ago in this missive that Manufacturing may have hit a bottom, and if last weeks ISM number is any indication, I may be right. The ISM Manufacturing Index rose to 50.9 in January easily beating the expected 48.5 (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
- Durable Goods Orders: Orders for durable goods rose in December by 2.4%. Orders are down 3.7% from a year ago and this may well be linked to the Manufacturing slowdown we witnessed in 2019. This gauge will be closely watched in the coming months as the Coronavirus scares works its way through the global economy.
- Fun fact of the week: FINALLY-The United Kingdom exited from the European Union (EU) last Friday 1/31/20, more than 3 ½ years after the Brexit vote that took place on 6/23/16 set in motion the sovereign divorce that was initially approved by 52% of UK voters. 72.2% of eligible UK voters cast a ballot in the 2016 Brexit referendum. The highest percentage of eligible voters to cast a ballot in a US presidential election in the last 100 years is 62.8% in 1960. The UK joined the EU in 1973 (source: NBC News).
Weekly index performance: Risk markets rallied last week: The S&P 500 was up 3.21% last week, the Russell 1000 Growth index was up 3.77% and the Russell 1000 Value was up 2.47%. Small caps followed suit with the Russell 2000 up 2.67%. International markets were up with the EAFE 1.86% higher, and Emerging markets up 2.75%. Turning to fixed income, the broad market US Aggregate was down slightly, losing 0.07%, while the High Yield index was up 0.62% last week. The US 10 year is at 1.56% this morning.
Bottom line: Earnings season will mostly be wrapped up here in the next two weeks, and in my opinion – so far so good. It seems like we just can’t catch a break here and let fundamentals do the heavy lifting. If it’s not trade wars, it’s BREXIT. If not BREXIT, it’s Iran, if not Iran, it’s politics. If not politics, its Coronavirus. Fundamentals still appear on solid ground, but I am getting concerned about valuations in some areas. Historically, Presidential election years in the US tend to be “noiseless” in markets – that is, slightly less volatility. We haven’t gotten that yet – we have already had multiple 400 point moves in the Dow Jones Industrial Average and its only February 10th. With a solid economic backdrop, it’s important to stay invested, while at the same time keeping an eye on anything that may derail economic growth.