ND&S Weekly Commentary 02.24.20 – Coronavirus Scare

February 24, 2020

Throughout the holiday-shortened week, reports of the COVID-19 coronavirus spreading to other countries created fears of a global economic slowdown. Investors and traders reversed course and went from risk-on to risk-off investments. As a result the Dow Jones fell 1.36%, the S&P 500 was down 1.22% and the tech-heavy NASDAQ slid 1.55%. International equities also suffered with Developed (EAFE) and Developing (EM) down 1.23% and 1.96%, respectively.

On Friday the World Health Organization reported that there were 76,767 confirmed cases of COVID-19 and 2,247 deaths. China’s shutdown of business activity has affected supply chains throughout the world. The second largest economy reported that during the first two weeks of February car sales declined 92% year over year.

In the U.S., the composite economic PMI (Purchasing Managers’ Index), which includes service and manufacturing indexes, came in below 50 for the first time since 2013. U.S. existing home sales were also weak falling 1.3% in January to a 5.46 million annual rate. Housing starts were down 3.6%. The price of a barrel of West Texas Intermediate Crude for March delivery fell over 2% on Friday. Gold was boosted again as a safe haven asset up 1.8% for the week at $1,648.80 an ounce, reaching a seven year high.

The U.S. 10-year Treasury Note slipped to 1.47% the lowest level since early September. The 30-year T-Bond yield dropped to 1.89% reaching an historic all-time low. Recession worries are indicative of an inverted yield curve with the three month T-Bill yielding 1.55% while the two-year notes are 1.34%.

Despite a 3.1% fourth quarter profit growth for the S&P 500 companies and excluding the energy sector the growth rate was 6%, the coronavirus dominated the financial markets. The FAANG’s – Facebook, Apple, Amazon, Netflix and Google are up 10% year to date. Their average price to earnings ratio is up to 35 times estimated earnings from 21 times last year. Another huge holding is Microsoft at $1.4 trillion in market cap. Microsoft is up 14% year to date and trades at 31 times estimated earnings. The stock hasn’t traded at that level since the dot-com crisis.

We anticipate volatility to increase while, hopefully, the coronavirus can be contained and cured. The concentration and size of FAANG and Microsoft within major indices and their exposure to a slowing global economy is worrisome. We strongly feel that raising cash balances for foreseeable needs, assessing the risk of owning sizable positions and diversification will pave the way to stable returns.

This week consumer confidence will be reported on Tuesday, new home sales on Wednesday and personal income and spending on Friday.

“Although the world is full of suffering, it is full also of the overcoming of it.” – Helen Keller