Blood Drawn

Blood drawn. Stocks traded lower yesterday giving up early-session gains as traders continue to fear the spread of COVID-19. Housing in the US remains strong but that was not enough to revive stock buying.

 

N O T E W O R T H Y

 

On the “cusp”, off the cuff. Equities started yesterday’s session in the green allowing investors some breathing room, if only for a short while.  A Food and Drug Administration official was quoted saying that the world was “… on the cusp of a pandemic”.  Trading bots were the first to hit bids (a fancy way to say selling) and soon everyone else began placing bets, mostly negative.  The result was another down day for most equity indices and a further erosion of yield on bonds.  This seems to be the common theme since panic befell the equity markets earlier this week.  This would be a good time to point out that the Coronavirus has been in the news for at least a month and that the S&P500 hit an all-time high close last Wednesday.  Interestingly, most of the financial news related to the virus has focused on the rapid growth of the virus and very little on the financial realities of the outbreak.  There seems to be a debate going on around whether or not to call the outbreak a pandemic or not.  While I understand that the label has political, administrative, and public relations implications, I can’t for the life of me understand what the P-word means for financial markets.  What I do understand is that there will certainly be some negative impacts on corporate performance.  Just how much, when, and how long it will last remains the big unknown.  Apple was the first high profile company to warn that the Chinese cordon would impact its sales and disrupt its supply chain.  Slowly but surely other companies followed suit but most simply mentioned it is a risk that is being monitored. MasterCard notably announced that the virus would impact its quarterly results the other day as well, marking the first high profile company outside of what many would consider to be China-dependent.  Those usual suspects would be technology manufacturing, low-cost labor production, fossil fuel, and yes… luxury goods.  Next up to the mic was Microsoft, who last night, announced that they too would miss quarterly revenue targets due to supply chain disruptions. Most of the tangible damage heretofore appears to be related to China’s virtually pressing the pause button.  The good headline is that new daily reported cases of the virus in China have been slowing indicating that it is getting closer to containment. Economists estimate that China is currently operating at 50% of its normal capacity but the big question remains when will it get back to full capacity.  Moreover, how many more global companies will be impacted by the slowdown?  The somewhat positive news is that the outbreak will be contained at some point and activity will return to normal allowing companies to get back to hitting their targets.  Until that happens we can expect some more repricing of stocks, specifically those that will be impacted.  Remember those fresh highs from last week?  Those highs meant that valuations of stocks were already being stretched.  The most common measure of stock value is earnings multiples, and if earnings expectations go down so will the prices of the affected stock… so the theory goes.  For now the selling appears to be indiscriminate as markets ponder the larger economic (systemic) effects of the virus.  Still, we can expect to get more tangible information from companies in the coming weeks.  Regarding the economy in general, it really is too early to tell if the outbreak will affect growth in the US.  The current stream of economic data, largely from January and even December, does not yet include the impact of the virus. Additionally, if the virus does begin to spread in the US causing a potential slowdown in consumption, there will certainly be economic implications.  Last night WHILE YOU ATE DINNER, President Trump held a news conference to calm fears of the virus’ spread to the US.  He said that we are “very, very ready for this” and appointed VP Mike Pence in charge of US efforts to fight the virus.  On the economy, The President said it was healthy and blamed any shortcomings on Boeing, General Motors, and the Fed.  On the markets, he is bullish and predicted that the Dow would hit 30,000.  Unfortunately, that was not enough for traders and equity futures fell overnight and are pointing to a weaker open.

 

THE MARKETS

 

Stocks could not sustain a relief rally yesterday as health officials warned that the COVID-19 virus was on the cusp of becoming a pandemic.  New Home Sales came in at the highest annualized growth pace since 2007… really!  Low interest rates, low unemployment, and consumer confidence are big factors in the growth.  The S&P500 fell by -0.38%, the Dow Jones Industrial Average sold off by -0.46%, the Russell 2000 dropped by -1.22%, and the NASDAQ Composite Index climbed by +0.17%.  Bonds rallied again yesterday and 10-year treasury yields fell by -2 basis points to 1.33%.  Crude oil fell by another -2.34% to its lowest level since December, 2018.

 

NXT UP

 

– Annualized GDP Growth is expected to be +2.1%, same as last month.

– Personal Consumption may have slowed slightly from +1.8% to +1.7%.

– Durable Goods Orders are expected to have slipped by -1.5% compared to last month’s growth of +2.4%

– Pending Home Sales are expected to have advanced by +3.0% compared to the prior reading of -4.9%.

– Chicago Fed President Charles Evans and Cleveland Fed President Loretta Mester will both speak today.

– This morning we will hear from Dell and Best Buy.  After the bell earnings will include VMware, Beyond Meat, AMC Entertainment, Mylan, and Monster Beverage.

daily chartbook 2020-02-27