ND&S Weekly Market Commentary (1.27.20) – The Threat of Virus

January 27, 2020

During the holiday shortened week, investors and traders were shocked by the news of China quarantining two cities and locking down nearly 18 million people to prevent the coronavirus from spreading. As a result, the Dow Jones Industrials (DJIA) declined 1.2%, the S&P 500 dropped 1.0% and the tech-heavy NASDAQ also slipped 0.8%. Emerging markets stocks (MSCI EM) which includes China, slid 2.4% and developed international (EAFE) lost 0.6%.

The global growth fears as a result of the virus have also hit commodities especially metals, oil and refined fuels. On Friday, copper prices recorded their largest weekly decline in five years. For the week, the price of US crude oil plunged over 7.5% to $54.14 per barrel. Gold closed the week 1.3% higher as fears of a global economic slowdown sent investors to safe haven assets.

Corporate earnings for the 4th quarter of 2019 have mostly come in ahead of analysts’ expectations. Over 70% of the companies that have reported beat their expectations according to FactSet. The sector dragging down earnings results is again energy. Over the last 5 years, energy stocks in the S&P 500 are down roughly 24% and are by far the worst performing sector.

US Treasury yields continued their downward trend as a result of concerns about the coronavirus outbreak triggering a flight to safety. The 10-year U.S. Treasury finished at 1.70% down from 1.92% at the beginning of the year.

On the economic front, December existing home sales climbed 3.6% to 5.540 million, surpassing the 5.430 million consensus. Though jobless claims rose modestly to 211,000, they were still lower than the 215,000 expected. The January IHS Markit Flash U.S. Manufacturing PMI fell to 51.7 from a reading of 52.4 in December. However, the PMI reading on Services activity advanced to 53.2 from 52.8.

This coming week we will see major economic data reported: Q4 GDP, new home sales, durable goods orders, consumer confidence and personal income/consumer spending. Leading companies, Apple, Facebook, Microsoft and many more will be reporting their quarterly results.

In addition to the impeachment hearing, geopolitical conflicts and the virus threats to the global economy, there are concerns that market valuations are a bit extended. The forward price-to-earnings (PE) ratio of 18.5 is the highest since June 2002, aside from a brief period in early 2018. We recommend raising cash levels for foreseeable needs while maintaining longer term asset allocations. Remember that dividend growth will continue to provide substantial returns for patient investors. In the fourth quarter investors added $10 billion to dividend exchange traded funds and we expect dividend focused investing will continue.

“Courage is an inner resolution to go forward despite obstacles” – Martin Luther King, Jr.