- Markets Lost Ground for the Week as Concern Over Coronavirus Builds
- Most Equity Indexes Finished January in the Red.
- Labor Markets Remain Robust
- Home Prices Continue To Rise
- Confidence Among Consumers Hits Its Highest Level in Five Months
- Federal Reserve Left Its Key Interest Rate Unchanged
Monday Morning QB - Market Performance:
The major U.S. equity benchmarks lost ground for the week as concerns continued to grow over the impact of the coronavirus on global economies.
The technology-heavy NASDAQ Composite index held up the best giving up “only” -1.8%, while the smaller-cap benchmarks fared the worst.
The Dow Jones Industrial Average lost 733 points to finish the week at 28,256, a decline of -2.5%. The large cap S&P 500 finished down -2.1%, while the S&P 400 midcap and small cap Russell 2000 indexes declined -2.8% and -2.9%, respectively.
A Look at the Global Picture- January Summary:
The great majority of equity indexes finished January lower.
In the U.S.-
The Dow Jones Industrial Average closed down -1.0% in January, while the Nasdaq Composite rose 2.0%.
By market cap, the large cap S&P 500 declined -0.2%, mid caps gave up -2.7%, and small caps finished down ‑3.3%.
In International markets-
Canada’s TSX gained 1.5%, while the United Kingdom’s FTSE gave up -3.4%.
France’s CAC declined -2.9%, Germany’s DAX ended down ‑2%, and Italy’s Milan FTSE gave up -1.2%.
In Asia, China’s Shanghai Composite retreated -2.4%, while Japan’s Nikkei ended down -1.9%.
As grouped by Morgan Stanley Capital International, emerging markets plunged -6.2% in January and developed markets finished the month down -2.8%.
Commodities were decidedly mixed in January-
Gold and Silver finished the month up 4.3% and 0.5%, respectively, but Oil and Copper plunged -15.6% and -10.0%.
2020 Starts With Positive U.S. Outlook
Confidence among the nation’s consumers hit its highest level in five months at the start of 2020 the Conference Board reported.
Buoyed by a “Phase One” trade deal with China, a soaring stock market (at the time), and the lowest unemployment rate in 50 years, Americans began the new year with the most confidence since the prior summer.
The Consumer Confidence index rose 3.4 points to 131.6 in January. In the details, the index that gauges how consumers feel about the economy "at the moment" rose 5 points to 175.3, while the index that assesses how Americans view "the next six months" - the so-called future expectations index - edged up 2.5 points to 102.5.
Lynn Franco, director of economics at the Conference Board stated, “Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020.”
Stressing that the U.S. economy is in good shape, the Federal Reserve left its key interest rate unchanged but stated it is closely monitoring the severity of the deadly coronavirus and its impact on the global economy.
The central bank reiterated its view that the U.S. is growing at a “moderate rate” while inflation remains subdued.
In a separate move, the Fed raised a special interest rate on banks meant to ensure the efficient functioning of financial markets and help the central bank keep a better handle on short-term interest rates.
The central bank voted to lift the rate it pays banks for excess reserves parked at the central bank, known as the IOER for “Interest On Excess Reserves” to 1.6% from 1.55%. Powell characterized the move as a “small technical adjustment” made necessary by all the liquidity flooding into the market.
GDP for the fourth quarter of 2019 was reported at 2.1%, with a boost from the shrinking trade deficit and a resurgent housing market. Analysts had forecast an increase of just 1.9%.
The U.S. got off to a strong start last year as GDP surged 3.1% in the first quarter, but growth tapered off to around the 2% average as the trade war with China intensified and business investment slumped.
The main engine of the U.S. economy, consumer spending, rose at a 1.8% pace in the fourth quarter. Household spending continued to underpin the economy over the past year as unemployment fell to a 50-year low of 3.5%. Looking ahead, most economists predict the U.S. will grow less than 2% in 2020, compared with 2.3% in 2019 and 2.9% in 2018.
The number of Americans seeking first-time unemployment benefits fell slightly last week, indicating the labor market remains robust.
The Labor Department reported initial jobless claims declined by 7,000 to 216,000 and that the more stable monthly average of new claims fell by 1,750 to 214,500. New unemployment claims briefly fell under 200,000 last April to a 50-year low, and have remained near that level ever since.
Continuing claims, which counts the number of people already receiving benefits, fell by 44,000 to 1.7 million—also close to post-recession lows. (That number is reported with a one-week delay.)
Home Prices Continue to Appreciate, Slow Sales
Home prices continued to rise in November as buyers found fewer homes to buy.
S&P/CoreLogic reported their Case-Shiller 20-city home price index increased 2.6% in November from the same time last year. Month-over-month the index ticked up just 0.1% in November compared with October on a seasonally-adjusted basis.
Nationwide, home prices were up on an annual basis by 3.5% - a faster rate of appreciation than in October. Phoenix, Charlotte, N.C., and Tampa, Florida comprised the top three cities with the highest home-price appreciation.
Notably, all 20 of the cities the index tracks reported price increases.
The number of pending home sales, or transactions in which a contract has been signed but not yet closed, declined 4.9% in December from the previous month, the National Association of Realtors (NAR) reported.
By region, sales were down 5.5% in the South, 5.4% in the West, 4% in the Northeast, and 3.6% in the Midwest. The drop in contract signings in December suggests that the existing home sales reports coming out in the near future will likely be weak.
Lawrence Yun, NAR chief economist, blamed high prices and not enough inventory for the decline. “The state of housing in 2020 will depend on whether home builders bring more affordable homes to the market,” he wrote.
Japan Reports Concerns Over Coronavirus Impact
Japanese Economy Minister Yasutoshi Nishimura warned that corporate profits and factory production might take a hit from the coronavirus outbreak in China that has rattled global equity markets.
“There are concerns over the impact to the global economy from the spread of infection in China, transportation disruptions, cancellation of group tours from China and an extension in the Lunar Holiday,” Nishimura told a news conference after a regular cabinet meeting.
“If the situation takes longer to subside, we’re concerned it could hurt Japanese exports, output and corporate profits via the impact on Chinese consumption and production,” he said.
Automaker Honda Motor, which has three plants in Wuhan, the epicenter of the outbreak, plans to evacuate some staff.
What Does This All Mean?
Over the past week plus, fears surrounding the coronavirus have weighed on global equity markets. U.S. equities were lower in Friday trading, ending near the worst levels of the day.
While near-term uncertainty can and should be expected, Marc Chaikin made the point in his note over the weekend that the Fed intends to stimulate the economy in order to increase the inflation rate while also providing liquidity to the overnight repo market through the April tax period.
Consumer Discretionary outperformed thanks to a strong post-earnings move from AMZN.
Energy, Technology and Industrials underperformed.
Treasuries were stronger with the curve steepening; the 30-year yield traded below 2%. The dollar was weaker on the major crosses. Gold ended down 0.1%. WTI Crude closed down 1.1%, though off the worst levels of the session.
Please keep in mind that the last couple weeks negative market action has moved our short term indicator to negative.
We will continue to watch how the market moves and how it may effect your portfolio over the coming days and weeks.
We will keep you informed.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.wantchinatimes.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)