28 Seconds Later

28 seconds later.  The bulls are back and stocks legged higher on reports that researchers have found a potential treatment for the Coronavirus.  The US services sector showed signs of optimism in the latest PMI releases.

N O T E W O R T H Y

• Unflappable.  Just two weeks ago, that’s 336 hours ago, I wrote a note entitled “28 hours later” in which I looked at potential long term market effects of the Coronavirus.  The title was a play on the 1980’s zombie movie about a virus outbreak in the UK.  In the post I looked at past viral outbreaks and shared specific numbers from the SARS outbreak which showed that the markets were only temporarily impacted by the outbreak, despite the global economic cost.  Today’s note entitled “28 Seconds Later” is a play on the same theme but reflects how quickly the bulls have shrugged off the virus and returned to their voracious consumption of stocks.  As of this morning there have been 28,018 confirmed cases of the virus and 565 people have died as a result.  Those numbers, which are rapidly growing, appear to be of no concern to investors who yesterday drove stocks back up to all time highs.  What virus?  The surge started as Chinese TV news reported that researchers at Zhejiang University had found a treatment for the Coronavirus. Later some good services PMI’s and an upbeat beat in an employment indicator put the buying in high gear.  In the days since the virus was first announced I have also wrote that investors needed a reason to take a break from the rapid upswing that closed out 2019 and followed through into January. Pullbacks are natural and healthy but have recently seemed to be hard to find as valuations have soared pushing stocks into overbought territory.  It is not clear if investors were factoring in the potential economic impacts of the outbreak or just looking for a reason to take some profit. Stocks, once overbought, started to look attractive after the pullback and investors were waiting for the right catalyst, or excuse to get back in.  And yesterday they did just that buying up the hardest hit sectors like airlines (up over +5% in the last two sessions) and energy (up by +3.78 yesterday alone).  It is too early to determine if the market impact of the virus is completely out of the system, but one thing for sure is that the Chinese government is trying hard to keep its frail economy moving.  WHILE YOU SLEPT, Beijing announced that it would remove some tariffs imposed on US imports which prompted stock futures to trade up overnight.  The virus can take up to 14 days to become symptomatic.  The opposite case appears to be true with stocks in which it took just 14 days for the markets to go from affected to unaffected.
• Energetic.  The energy sector has had a tough year.  It was the only sector to lose value in the past twelve months.  The industry is facing oversupplies of crude oil and natural gas while demand has been affected by the trade war, the ailing Chinese economy, and more recently, the Coronavirus outbreak.  Prior to the virus, OPEC+ had been slashing production in order to prop up prices and the results could be seen as crude prices climbed through the fourth quarter of last year reaching a peak of $63 / barrel on Jan 3rd only to be knocked down in recent weeks as the virus affected Chinese demand. The energy sector followed a similar path, but looking back further, the sector has had a rough journey.  From its low after the financial crisis, the sector rallied by +147% to a peak in mid-2014 after which the sector lost -47% by 2016. Since then the sector has had a tough time regaining its former growth path, only adding +10%  from its lows (despite an energy supportive Administration) while the S&P500 grew by +68% and the NASDAQ jumped by +117% during that same interval.  A supply glut from shale oil has certainly been part of the challenge for the sector, and demand, which ebbs and flows has affected it as well.  But one factor which may be affecting energy stocks more than oil and gas prices may be the green wave.  No, it’s not the increased amount of Teslas on the turnpike, or even the giant wind farms that are springing up all over the place.  I am referring to the wave in which investors have been progressively announcing a divestiture from fossil fuel stocks.  I am talking about giants like BlackRock and public pension funds, who are increasingly embracing socially responsible investing.  Since January 2018 the S&P500 Global Clean Energy Sector has grown by +33%… over that same period the S&P500 Energy Sector has fallen by -28%.  So, not only can supply and demand of a commodity affect an investment portfolio, but also supply and demand of a stock itself.

THE MARKETS

Stocks jumped once again as the bulls rushed back in to buy stocks which were cheapened by the virus inspired selloff.  ADP Employment Change implied that the employment situation remains strong and a better-than-expected non-manufacturing PMI pointed to a healthy services economy.  The S&P500 climbed by +1.13%, the Dow Jones Industrial Average jumped by +1.68%, the Russell 2000 traded up by +1.52%, and the NASDAQ Composite Index added +0.43%. Bonds slipped and 10-year treasury yields climbed by +6 basis points to 1.65%.  Crude oil finally saw some relief and rallied by +2.3%, its first significant positive move in over two weeks.

NXT UP

– Non-farm Productivity may have grown by +1.6% after falling by -0.2% last month.

– Dallas Fed President Robert Kaplan and Fed Governor Randall Quarles will both speak today.

– This morning New York Times, Abiomed, and Philip Morris beat estimates while Yum! Brands and Regeneron came up short.  We will hear from Kellog, Uber, and Bristol-Myers Squibb before the bell.  After the market reporters include Take-Two Interactive and Activision Blizzard.

daily chartbook 2020-02-06