STOCKS LEAP TO NEW HIGHS AS IMPEACHMENT PROCEEDINGS END AND A STELLAR JOBS REPORT AND MANUFACTURING INDEX SURPRISE

Weekly Market Update — February 7, 2020

• The stock markets shook off negative numbers from the past two weeks and jumped to new highs, as investors seemed to think the coronavirus was contained, the impeachment saga is over and employment numbers came in hot
• NASDAQ led the way with a 4.0% jump, but the S&P 500 and DJIA each moved up markedly, with returns of 3.2% and 3.0%, respectively
• The smaller–cap Russell 2000 moved up 2.6% on the week, but it wasn\’t enough to drag it out of the red for the YTD
• Almost all of the 11 S&P 500 sectors were positive, apart from the Utilities sector which dropped 0.6%
• The Information Technology sector led the way with a gain of 4.5% and Materials was right behind with an advance of 4.2%
• Wall Street received data on the jobs front that showed nonfarm payrolls grow by 225,000 in January, much higher than expectations
• The jobs report was also accompanied by data that showed wage growth is outpacing inflation, if even by just a little
• The January ISM Manufacturing Index surprised by moving into expansion territory after five straight months of contraction
• U.S. Treasuries finished the week lower, with the 2–year yield coming to rest at 1.39% and the 10–year yield finishing at 1.58%
• The U.S. Dollar Index rose 1.3%
• WTI crude fell $1.23 and is dangerously close to that $50/barrel threshold

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.

The Week Saw a Lot of Positive News and Data

U.S. stock markets ended the week higher, recording their biggest weekly gain in about six months. While news of President Trump\’s acquittal didn\’t really surprise anyone or the markets, generally speaking, the markets reacted favorably to the ordeal being put to rest. But throughout the week, there was just a drumbeat of positive news all around:.

• Experts are suggesting that the coronavirus will be contained and the economic impact will be less than expected
• January\’s Employment Situation Report showed that the U.S. added 225,000 jobs last month, well ahead of the 160,000 expected
• Wage growth accelerated and is outpacing inflation by a decent margin
• The Purchasing Managers\’ Index, a measure of manufacturing activity, surprised most and expanded in January to the highest level since July
• China announced that it will cut tariffs on $75 billion of U.S. goods as outlined in Phase One of the agreement

Jobs Report is More than A Goldilocks Report

The latest jobs report showed the U.S. economy added a staggering 225,000 jobs in January, driven by big gains in health services, construction, and education, and despite close to 12,000 jobs in manufacturing being lost. The unseasonably warm January contributed to the spike in construction jobs and the overall job participation rate hit its highest level since 2013. And the three-month average of job gains stands at 211,000, another very positive sign.

Equally as important to the health of the economy were positive wage gains, which were up slightly last month and increased to 3.1% year–over–year, ahead of the 2% inflation numbers.

Earnings Growth Is Better than Predicted

Given 2019’s performance, especially among large–caps, expectations for earnings growth in 2020 were subdued. But with 64% of S&P 500 companies reporting by week’s end, earnings in aggregate are ahead of expectations.

From FactSet:

• In terms of earnings, the percentage of companies reporting actual EPS above estimates (71%) is below the five–year average.
• In aggregate, companies are reporting earnings that are 4.6% above the estimates, which is also below the five–year average.
• In terms of sales, the percentage of companies (67%) reporting actual sales above estimates is above the five–year average.
• In aggregate, companies are reporting sales that are 0.7% above estimates, which is below the five–year average.

Coronavirus is Still a Worry

As of the end of the week, the World Health Organization has reported over 30,000 coronavirus cases with 270 of those outside of China in 24 different countries. The Federal Reserve Informed Congress that the coronavirus could negatively impact global growth this year and next, given the sheer size of the Chinese economy, especially given China\’s supplier to the world status.

Most of the impact on businesses has been limited to China, as travel is reduced and businesses are closed. But some companies like Walt Disney and Nike are already warning that the virus will negatively impact financial results.

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