STOCKS PULL BACK FOR SECOND WEEK IN A ROW AS THE CORONAVIRUS GETS WORSE, EARNINGS DISAPPOINT AND GDP REMAINS SOLID

Weekly Market Update — January 31, 2020

• The stock market dropped again this week, as the outbreak of the coronavirus dominated the news and grew progressively worse as the week wore on
• The small–cap Russell 2000 was the week\’s biggest loser, shedding 2.9%, but the narrowly defined large–cap DJIA was not far behind as it dropped 2.5% on the week
• The S&P 500 dropped 2.1% and NASDAQ lost 1.8% as 3 of the 4 major U.S. indices ended the first month of 2020 painted red
• Of the S&P 500 sectors, it was the Energy sector that once again lost the most, giving back 5.7% on the week
• The Materials and Health Care sectors both took it on the chin this week, with losses of 3.5% and 3.3%, respectively
• This week was the biggest weekly decline for U.S. stocks since October
• The World Health Organization declared an international public–health emergency pushing bonds to rally as a flight to safety increased as the week wore on
• As expected by most and lost in the coronavirus and impeachment headlines was the fact that the Federal Reserve left short-term interest rates unchanged
• Fourth–quarter GDP was released and it reported that the U.S. economy grew at a 2.1% annual rate
• U.S. Treasuries ended the week with gains as the 2–year yield and the 10–year both dropped to 1.32% and 1.52%, respectively
• WTI crude fell a whopping 4.9% to $51.58/barrel

Weekly Market Performance

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

U.S. Stocks Drop Two Weeks in a Row Due to Coronavirus

U.S. equities were negative for the second week in a row, and it was the coronavirus and not the impeachment proceedings that weighed on the markets all week. Turning in the worst weekly performance since last October, the week\’s negative numbers pushed all the major U.S. equity markets into the red, except for NASDAQ which scratched out a 2% gain for the month of January.

But the pullback in stocks was global, not just confined to the U.S., as MSCI EAFE\’s decline was in line with U.S. markets. The worry is that the coronavirus will get much worse before it gets better and that the spread will be outside of China, hurting global trade, travel and overall global growth.

As a result of this week\’s worries, investors fled to safety, specifically towards the safety of U.S. Treasuries, pushing the 10–year yield to 1.50%.

Comparing the Coronavirus to SARS

The World Health Organization declared the coronavirus a global health emergency, as the total number of confirmed cases is rising towards 10,000, including more and more cases outside of China’s borders.

While the virus is still in the early stages, it has already made an impact, as flights are being canceled, businesses are being closed and disruptions in China’s supplier-economy are being impacted.

The economic impact of the coronavirus is impossible to predict, but the SARS outbreak might be important to remember. In November 2002, SARS – severe acute respiratory syndrome – began in China\’s Guangdong province, on the border of Hong Kong. During the SARS pandemic, there were over 8,000 reported cases and 774 deaths, meaning the virus killed 1 in 10 who were infected.

Shortly after the SARS pandemic was brought under control, researchers Jong–Wha Lee and Warwick J. McKibbin released a report with the title: Estimating the Global Economic Costs of SARS. The researchers determined that when translated into an absolute dollar amount, the global economic loss from SARS was close to $40 billion.

Since 2004, there have been no reported instances of SARS anywhere in the world.

Earnings Worries

By the end of the week, fully 45% of S&P 500 companies have reported results for the fourth quarter of 2019. According to research firm FactSet:

• In terms of earnings, the percentage of companies reporting actual EPS above estimates (69%) is below the five–year average.
• In aggregate, companies are reporting earnings that are 4.1% above the estimates, which is also below the five–year average.
• In terms of sales, the percentage of companies (65%) reporting actual sales above estimates is above the five–year average.
• In aggregate, companies are reporting sales that are 0.6% above estimates, which is below the five–year average.

But the week felt like there were more earnings disappointments and fewer surprises on the upside. Yes, Apple and Microsoft reported strong results, but among the disappointments were Facebook, Visa, UPS, 3M, Pfizer, Caterpillar, and DuPont.

Facebook garnered a lot of attention because its earnings actually beat earnings and revenues estimates and still the stock got whacked by 7% in the trading hours immediately after its announcement.

GDP Numbers are Solid

Late in the week, the U.S. Department of Commerce reported that real gross domestic product increased at an annual rate of 2.1% in the fourth quarter of 2019, the same as the third quarter of 2019.

From the Bureau of Economic Analysis release:

“The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, state and local government spending, residential fixed investment, and exports, that were partly offset by negative contributions from private inventory investment and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The GDP growth in the fourth quarter was the same as that in the third. In the fourth quarter, a downturn in imports, an acceleration in government spending, and a smaller decrease in nonresidential investment were offset by a larger decrease in private inventory investment and a slowdown in PCE.”

bea.gov; bls.gov; census.gov; standardandpoors.com; factset.com; nyse.com; msci.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com