January Market Update: Market Complacency Upended by Coronavirus Fears
January 2020 Snapshot
As we began a new decade, it looked as though we were continuing right where we left off with equities rising almost daily, growth stocks beating value stocks, and enthusiasm on the rise. At the yearly Economic Forum in Davos, Switzerland we couldn’t find an interview or report from a CEO who was still not enthusiastic about U.S. growth prospects and cautiously optimistic about world growth. However, all of that faded quickly as news broke of a deadly new strain of coronavirus coming out of China. With January behind us, let’s review a few other important happenings that took place as we started off the new decade.
Consumer spending for 4th quarter 2019 was released showing +1.8% growth, which was better than expected. Since the consumer makes up about 68% of total GDP, it’s one of the most important economic indicators to study. U.S. retail sales results were also released for 4th quarter up 4.0% year-over-year, and provided another signal that the U.S. economy is on steady footing. ISM Non-Manufacturing (service) Index posted a better-then-expected result of 55.0 for the December month, but the ISM Manufacturing Index continued to disappoint with another reading below 50 in the factory/manufacturing space. We have spoken about this for some time and believe a bulk of this weakness is due to trade uncertainty around the U.S.-China sanctions. Lastly, we saw that 4th quarter and full year 2019 GDP performed mostly in-line with forecasts, up 2.1% and 2.3% respectively.
We witnessed a bit of overzealous market enthusiasm for the first few weeks of January as the trade deal, economic data, and strong corporate earnings prevailed. On the earning front we saw very good results out of consumer-related companies like Amazon, Colgate-Palmolive, Apple, Coca-Cola, and Starbucks to name a few. Earnings disappointments centered around the manufacturing names like Caterpillar, Sherwin-Williams, and Stanley Black & Decker. Investors ignored the bad news of missile strikes, impeachment, and lowered growth expectation by the IMF. The result was the S&P 500 up almost 3.0% during the first few weeks of the new year. This is pretty dramatic when you consider that our estimates for full year 2020 U.S. equity growth is in the 4.0-6.0% range.
Coronavirus Fears Take Hold of Market
All the complacency and enthusiasm stopped the last week of January when news continued to break on the coronavirus (2019-nCov) which was first reported in Wuhan, China on December 31, 2019 and had not previously been identified in humans. As the outbreak spread across China and then to other countries (28 as of this writing) fear overtook enthusiasm quickly. On January 30th the World Health Organization cited coronavirus as a “global health emergency.” The next day the Dow Jones Industrial Average fell over 600 points or down -2.1%. Please refer to our February 4th Flash Report “Coronavirus Outbreak: Our Observations” on our website for more details on this topic.
January markets ended in mostly negative territory with the All World Equity Index (MSCI ACWI) down -1.1% due mostly to international markets. As you would expect, emerging markets fared the worst down -4.7% with international developed markets down -2.1%. The U.S. was also negative, but not as severe with the S&P 500 almost flat, midcap stocks down -0.8% and the small cap index, Russell 2000, down -3.2%. Real estate was positive as measured by the FTSE Nareit All Equity Index up +1.3%. Bond returns were the highlight of the month up +1.9% due to rising bond prices, which negatively correlate with bond yields.
Bond yields were in the spotlight at month-end because of the dramatic retreat in rates. The 10 Year yield fell 37 basis points from 1.89% January 1st to 1.52% on January 31st. The yield curve even inverted on the last day of the month when looking at the 3-month Treasury (1.55%) compared to the 10 Year Treasury (1.52%). Investors were quickly trying to find a safe haven before markets closed for the weekend.
In the first few days of February, we’ve seen a rebound in global equities reversing the declines brought about by epidemic fears. We are once again witnessing the normal volatility we expect to see, it just doesn’t always feel so great when it happens.
As always, your Sandy Cove team is available to answer any questions about the markets or your portfolio.