Weekly market update
Investor fears about the growing impact of the Coronavirus outbreak in China rattled global stock markets last week, sending down the Dow 1.2%, the S&P500 1.01%, the NASDAQ 0.79% and the Russell 2000 2.19%.
That was tame compared to how Chinese stocks fared—the MSCI China was down over 4%—despite the Chinese government’s extensive measures to isolate impacted cities.
You may hear from market analysts about this being a “Black Swan Event”. So, I wanted to offer up a refresher on exactly what that means.
A black swan is an extremely rare event with severe consequences. It cannot be predicted beforehand, though many claim it should be predictable after the fact. Black swan events can cause catastrophic damage to an economy, and because they cannot be predicted, they can only be prepared for by building robust systems. Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.
How many chief market strategists had “a virus caused by people eating bats and snakes” in their 2020 Outlook notes this December? Not a one!
We did have some earnings surprises last week from a few select names but the markets were solely focused on the virus outbreak and the impact on the markets. Although stocks were in selloff mode, U.S. Treasuries caught a bid and yields fell from 1.81% on the 10-year to its current 1.6% level—a reminder, when yields go down, the bond prices are on the rise.
On the economic front, jobless claims rose slightly to 211,000. The flash PMI manufacturing index fell to 51.7 and the flash services PMI rose to 53.2. December’s existing-home sales were up 3.6% vs. 1.5% est. & -1.7% in the prior month; that’s the best pace in nearly 2 years, as low interest rates continued to lure buyers despite record-low inventories. Not just record-low inventories, it is the lowest supply of inventory on record, driving up prices and creating fears that eventually, buyers will be “choked out of the market.”
A worse-than-expected 0.3% MoM drop in the Conference Board’s leading economic index, ending the year with five down months in the last six. The biggest positive contributor to the leading index was stock prices at 0.09% and the biggest negative contributor was jobless claims at -0.23%. The LEI is clearly not recovering…
This is a very busy week for earnings as we will get about one-third of S&P500 companies reporting. We will also see what names like McDonald’s, Disney and Starbuck have to say about the Coronavirus as they have suspended operations in China.
We will also get the first estimate of Q4 2019 GDP, consumer confidence and sentiment, new home sales and personal income and spending. These are all important, and not to forget, the FED meets this week and even though there will not be a rate increase, we will see what they have to say about the potential economic impact of the Coronavirus on our economy.
We will be monitoring the potential market reaction to this virus, but I will say, the markets were clearly looking for any reason to sell off as we were in extremely overbought conditions, but how much more selling, we will see and we are committed to keeping you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
