Dipped.

Dipped.  Stocks sold off on Friday on fears of COVID-19’s spread outside of China increase. Weak PMI’s brought the bears back to the markets.

 

N O T E W O R T H Y

 

Neutral is your friend. For those of you that work with me on a regular basis, you have probably heard me use the term many times before.  It comes from a label my father had posted at the helm of our boat when I was young to remind me not to panic when the boat was being pushed around by currents, the wind, and momentum.  The instinct is to react to all of these pressures which usually just adds to the tumult.  The prescription is to put the engines in neutral and wait for the boat to move in a discernible direction and then react with a calm, well thought-out, response. Stocks have been rising for the past several months in the face of increasing global risk which crescendoed early in January with the Coronavirus outbreak in China.  China was on its heels as a result of the trade war with the US and a cyclical downtrend in its economic growth.  Good news came by the end of 2019 as the signing of the Phase One trade deal evidenced a thawing of the row between China and the US. Then came the unthinkable as the Coronavirus took hold in China virtually shutting down the second largest economy.  Initially, the US market reaction was somewhat subdued as many looked back to prior virus outbreaks to note that markets eventually recover from outbreaks once they are contained.  On the economic front, the Chinese government went on a spending spree to insulate its ailing economy.  In the US, the Fed, which would be the first line of defense, has made it clear that they are monitoring the situation but, so far, believes that the outbreak would not warrant further stimulus as the economic effects would be limited.  So far being the operative words.  I have written in many of my notes about the potential impacts on US companies which have been and will be impacted by the virus outbreak.  Apple was the first such notable company to come forward with real impacts on its business and many have followed.  So why is the Fed not racing to lower rates?  Because the central bankers are watching the economy and not Apple’s earnings.  The total number of infected and deaths are, in fact growing, but if you observe the numbers from a growth perspective the spread appears to be slowing.  Eventually, the virus will be contained and companies with supply chain or consumer exposure in Asia will be able to get back to business as usual. Clearly there is no telling when the virus will be contained as reports of its spread outside of China have been on the increase. This weekend, WHILE YOU SLEPT many new cases were reported in South Korea and Japan while some new cases have appeared in Italy, and the Persian Gulf states.  Futures markets have reacted sending stocks sliding overnight while safe-haven assets such as treasury bonds and gold have risen.  Investors with diversified portfolios will therefore have some insulation from the swing in equities.  Many investors will wake up this morning to hear reports of the markets slide and feel compelled to react in some way but the best approach is to remain focused on the long run and ensure that your portfolios are properly diversified.  In other words, neutral may be your best friend right now.

 

THE MARKETS

 

Stocks slid on Friday on fears of the Coronavirus’ spread outside of China and a weak set of PMI’s. Notable in Friday’s release was the Markit Manufacturing PMI coming in below expectations at 49.4.  A PMI reading below 50 indicate a contraction and while the US manufacturing economy has been under pressure for the past two years, the services economy has been weak but holding up, so Friday’s sub-50 print came as a negative surprise adding to the market’s slide.  The S&P500 fell by -1.05%, the Dow Jones Industrial Average dropped by -1.79%, the Russell 2000 slipped by -1.03%, and the NASDAQ Composite Index sold off by -1.79%.  Bonds climbed and the 10-year treasury yields fell by -4 basis points to 1.47%.

 

NXT UP

 

– Chicago Fed National Activity Index is expected to have declined by -0.16% compared to last month’s decline of -0.35%.

– Dallas Fed Manufacturing Activity may have flattened out after declining by -0.2% in January.

– Cleveland Fed President Loretta Mester will speak today.

– After the bell we will hear from Intuit, Shake Shack, Palo Alto Networks, Hertz Global, and Hewlett Packard.

– In the week ahead we will get some more corporate earnings along with economic numbers that include some regional Fed indices, housing numbers, Durable Goods Orders, Consumer Confidence, University of Michigan Sentiment, GDP, Personal Spending, and the PCE Deflators.  Please refer to the attached economic and earnings calendars for details.

daily chartbook 2020-02-24

econ numbers 2_24

earnings releases 2_24