Going Viral

Going viral.  Stocks sold off on Friday as news about new cases of Coronavirus gave traders panicky symptoms.  An overbought market was looking for reasons to take a break.

 

N O T E W O R T H Y

 

Just can’t shake this shaky feeling.  I have made no secret about my discomfort with recent gains in the stock markets.  Let’s get the obvious out of the way. Unemployment is low, interest rates are low, the Fed is here to help, retail sales remain solid, and earnings (so far) have been beating expectations.  Oh, the US and China have signed their long awaited Phase One trade agreement.  All of these factors are positive for stocks, but the big question that remains is: how positive?  In a vacuum, stocks would rally and continue to rally on the aforementioned conditions… but, alas, we do not live in a vacuum.  There are still lots of negative factors that continue to pass across the tape. We are in an election year, and one which is expected to be a close race between Republicans and Democrats. A win from either side will certainly yield market-affecting policy.  I intentionally avoid writing about the impeachment drama happening in the Capital because it shouldn’t (and historically didn’t) affect the markets, however the growing divide amongst lawmakers all but guarantees that Congress will be unable to effectively legislate.  The US economy is a whole other factor.  The economy continues to saunter forward, though perhaps “plod along” might be a better way to describe it.  Manufacturing has suffered, agriculture is in pain (though hopefully may get some relief from the recent Phase One deal), and corporations are not spending money.  Remember that the US Economy is driven by three principal components: consumer spending, business investment, and government spending.  Businesses have been slowing down on investments and that has certainly caught the Fed’s attention.  All of the excess cash generated from the 2017 tax plan was supposed to be spent on investment, unfortunately it appears that the bulk of it was spent on dividends and stock buybacks, which was good for stocks but no-so-good for the economy.  Thankfully, the consumer, which accounts for around 2/3 of economic growth continues to spend money, and lots of it.  So the consumer, almost all alone, has been pulling the US economy forward.  Consumers are interesting because they are not as rational as economists like to believe.  Sure they buy less when prices go up or when they lose their jobs but one of the largest factors in their purchase decisions still remains the hard-to-quantify confidence.  It is clear that, so far, consumers remain confident.  So why am I so guarded in my optimism about equities?  Markets are like living breathing entities that go through stages of excess and pullback. Think about how many of us enjoy the holidays with gusto, perhaps retiring the bathroom scale to the linen closet only to be reminded of it when that favorite pair of pants starts to fit snugly (usually on or around January 3rd).  That is usually the sign that it is time to pullback and, perhaps, go on a diet.  Stocks are now overbought and trading at multiples that are above historical averages and markets appear to be unfazed by bad news prompting me to write about honey badgers and use tag lines like Comfortably Numb.  The VIX index, which is a measure of stock market volatility, has remained low for some time, indicating that investors are not aggressively buying downside protection.  Complacency in markets usually leads to a burst in volatility which is typically uncomfortable for investors.  So, should the market be going up?   Yes, perhaps, but maybe at a slower, more sustainable pace. About that wake up call, it is not clear yet what it would be but it seems that the latest news about the spread of the Coronavirus has begun to get investors unsettled. While the virus certainly can affect Chinese GDP, which some economists have estimated could lose as much as -0.5%, it is not clear how it will affect US stocks. On Friday, stocks sold off on news of a second confirmed case in the US.  WHILE YOU RESTED over the weekend, three more cases of the virus were confirmed in the US, China now has 40 million people under lockdown, and Chinese authorities have confirmed more deaths related to the virus.  Global markets are down as a result and commodities such as crude oil remain under pressure.  Markets have been looking for a reason to tighten the belt and the virus may be the event that causes investors to pull that bathroom scale out of the linen closet.

 

THE MARKETS

 

Stocks sold off on Friday as news of a newly confirmed case of the Coronavirus in the US hit the tapes.  The S&P500 sold off by -0.9%, the Dow Jones Industrial Average traded down by -0.58%, the Russell 2000 dropped by -1.35%, and the NASDAQ Composite Index lost -0.93%. Bonds climbed as a safe haven investment and 10-year treasury yields dropped by -5 basis point to 1.68%.  Crude oil remains under pressure, giving up another -2.52% on Friday and Gold jumped another +0.55%.  The VIX index jumped by +12.17% to 14.56 on Friday underscoring growing volatility, though 14 is not quite “fear” level, which is thought to be more in the 20+ range.

 

UP NXT

 

– New Home Sales are expected to have climbed by +1.5% month over month, slightly faster than last month’s growth of +1.3%.

– Dallas Fed Manufacturing Activity is expected to be -1.8, better than last month’s -3.2.

– This morning Tanger Outlets and DR Horton beat expectations. We will hear from Sprint before the bell while F5 and Whirlpool will announce earnings after the bell.

– We have a busy week of earnings with 132 S&P500 companies reporting and lots of economic releases including more housing numbers, Durable Goods Orders, Consumer Confidence, University of Michigan Sentiment, GDP, Personal Consumption, and the PCE Deflator. The FOMC will meet this week and announce its monetary policy decision on Wednesday followed by a press conference which will be closely watched. Please refer to the attached economic and release calendars for release details.

 

daily chartbook 2020-01-27

earnings releases 1_27

econ numbers 1_27

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