It’s electric. Stocks soared yesterday as dip buyers took comfort in China’s economic inoculation. The NASDAQ powered up to new all time highs with the help of Tesla’s high flying stock, and no one really knows the reason.
N O T E W O R T H Y
Who’s in the driver seat? General market drivers come and go and are usually simple to identify but they can be very difficult to trade on. The signing of the Phase One Trade deal at the end of last year was good news and it took the markets’ key driver off the table, creating a vacuum as the new year rang in. Left over momentum from the fourth quarter kept stocks moving up and investors began to wonder if they could have another outperforming year like 2019. Then came the Wuhan virus, eventually named the Coronavirus, which quickly filled the market driver vacuum and caused chaos. The initial reaction was to sell, followed by buying, then more selling, which was ultimately followed by frenzy buying. I guess I could have just replaced that last sentence with the word volatility. When the outbreak was first announced, I reported in my “28 Hours Later” note that if the pattern of past viral outbreaks was any guide, that any long term market effects would be minimal. But the Coronavirus, which could take up to two weeks to appear after contraction, spread much quicker than the SARS virus (used by many as a comparison). The current amount of confirmed cases is now just under 25,000 and the death toll is around 500. Being that China is a critical puzzle piece in the global economy, one would expect a more sizable impact than in past outbreaks. China is the world largest importer of crude oil, they are a vital source for global manufacturing, and they remain the second largest economy in the world. China’s quick response to the virus by quarantining city after city would hopefully keep the virus from spreading further, but much of the damage had already been done. China’s next step was to shore up its already weakened economy by injecting cash into the economy and cutting key interest rates which was well received by the market. Another round of stimulus announced yesterday pushed equities higher. There is more to come, according to officials who spoke of further rate cuts and potential subsidies to affected businesses. So, DRIVER #1 is the Coronavirus, which is why it has dominated my notes over the past several days. DRIVER #2 is earnings season, which we are in the midst of. So far about 50% of S&P500 companies have reported and the results, so far, look encouraging. In this current market where companies help analysts set low bars by giving downbeat guidance, it is hard to judge a company on whether or not they beat Wall Street earnings estimates. Instead it is more prudent to look for things like earnings growth. Interestingly companies have been performing well in that department as well. Many have been predicting a slowing of growth over the past few quarters as the stimulative effects of the 2017 tax bill wore off and while growth did slow, it was far less than predicted. In this current earnings season, expectations were for a decline in earnings growth by -2%. So far earnings appear to be growing slightly over the zero mark… which is a good thing, especially if the trend continues. With those two primary drivers one could see why the markets have had a quick snap back. The big question that should remain is what will that driver look like a little farther down the road. Sure the markets should applaud China’s economic stimulus and positive earnings, but it should not ignore the longer term effects. Remember that we are getting corporate results from the 4th quarter of last year, prior to the virus outbreak. Since then airlines have cancelled flights, auto plants have shut down, cruises have been cancelled (some have been quarantined), casinos have been closed, theme parks have been shuttered, and purchases have been scaled back. One thing that many reports seem to ignore is China’s role as a consumer. China not only manufactures smart phones and sneakers, they are also large buyers of them. With Chinese consumers being shut in and furloughed from work during a key holiday buying season we can surely expect future corporate earnings to be effected. Still, it is anyone’s guess on how much more damage the virus will cause to the population, DRIVER #1, and even more importantly how much damage might be caused to future earnings and speculative market trades, DRIVER #2.
Stocks roared back further yesterday in response to Chinese economic stimulus intended to minimize the effects of the Coronavirus. The S&P500 climbed by +1.5%, the Dow Jones Industrial Average traded up by +1.44%, the Russell 2000 advanced by +1.5%, and the NASDAQ Composite Index surged by +2.1% to a new high. Bonds fell and 10-year treasury yields climbed by +7 basis points to 1.59%. Crude oil slipped by another -1% remaining the only affected asset to miss the party, though it may be a sign of a longer term issue, which I will discuss in a future note.
– ADP Employment Change is expected to reflect that +157k new jobs were added compared to last month’s additions of +202k.
– Markit Services PMI is expected to come in at 53.2, same as the last estimate.
– ISM Non-manufacturing PMI is expected to be 55.1, up slightly from the last reading of 54.9.
– Fed Governor Lael Brainard will speak today.
– This morning Coty, Merck, and Humana beat estimates. We will hear from GM and Fox before the bell and expect announcements from MetLife, Sonos, Twilio, Nuance, GrubHub, Peloton, Qualcomm, and Zynga after the close.