Weekly Market Update — March 3rd, 2020
Weekly Market Performance
|10-Year Treasury Yield||1.14%||-0.3%||-0.8%|
*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.
Coronavirus, Coronavirus, Coronavirus
Investors went into the week thinking that the coronavirus was somewhat contained and that markets could continue their march forward – how wrong everyone was. While glass-half–full investors would point to the silver lining that new cases in China are appearing to slow, the rest of the world focused on the explosion of cases outside of China, especially in Europe, the Middle East and the United States. President Trump asked for $2.5 billion to combat the virus and some on the other side of the aisle suggested that he should have asked for $8.5 billion.
When the final trading bell tolled on Friday, the escalating worries about the coronavirus and its global economic impact pushed the major indices into double–digit red numbers, which automatically push them into correction territory (a 10% decline from market high defines a correction where a 20% decline defines a recession).
The pace at which the markets fell was dramatic, as each of the major indices dropped more than 3% on all but one of the five trading days. This high–volume and volatile selling pushed investors to the perceived safety of Treasuries, driving the 10–year to a record low and raising the prospects of another rate cut by the Federal Reserve later this year.
While it is too early to tell if the market\’s unprecedented 11–year bull market run is now over, it is important to keep perspective by examining other historical market pull-backs. And historical market pull–backs of 5% or more happen on average 3 times a year, whereas corrections of 10% or more happen once a year on average and those 20% pull–backs (recessions) happen once every four years.
Maybe Some Good News?
While most of the news on the week was terrible for long–term investors, there were some nuggets of positive data that was almost completely overlooked:
- Personal incomes rose a very respectable 0.6% in January, which was significantly above expectations
- Durable goods orders fell much less than experts predicted
- Weekly jobless claims rose a bit
- Consumer sentiment remained high, although that will likely change in the coming weeks
- New home sales jumped dramatically in January
Coronavirus Impact on Corporate Earnings
The big question on every investors\’ mind is just how much the coronavirus might impact corporate earnings, especially since corporate earnings are such a large driver of stock prices.
Research firm FactSet attempted to answer that question by reviewing how often analysts have lowered earnings estimates for S&P 500 companies during the first two months of the quarter. Here is what they found:
“The Q1 bottom–up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) has dropped by 3.3% (to $39.33 from $40.68) during this period.”
But just how big is that 3.3% decline and how does it compare to recent quarters? From FactSet’s February 28th release:
“During the past five years (20 quarters), the average decline in the bottom–up EPS estimate during the first two months of a quarter has been 2.6%. During the past 10 years (40 quarters), the average decline in the bottom–up EPS estimate during the first two months of a quarter has been 2.3%. During the past 15 years (60 quarters), the average decline in the bottom–up EPS estimate during the first two months of a quarter has been 3.3%. Thus, the decline in the bottom–up EPS estimate recorded during the first two months of the first quarter was larger than the five–year average and the 10–year average, but equal to the 15–year average.”
But note this from FactSet:
“It is important to note that while this 3.3% decline is above the five–year average and the 10–year average, it is not an unusually high number. It is smaller than the decline recorded in the previous quarter (-4.2%) over the same time frame. It does not rank as one of the 10 largest declines in the bottom–up EPS estimate (over the first two months of the quarter) in the past 10 years. It is also much smaller than the declines of -23.6% and -27.8% recorded during the first two months of Q4 2008 and Q1 2009.”