Global equity markets stumbled last week amid concerns of an outbreak of the coronavirus that originated in the Chinese city of Wuhan and has been found in several cases internationally, including three confirmed cases in the United States. For the week, U.S. equities snapped off several consecutive weeks of gains with the S&P 500 falling -1.0%, while the Dow Jones and Nasdaq Composite recorded losses of -1.2% and -0.8%, respectively. All 3 indices remain within 1.3% of all-time highs. Bond yields also tumbled lower with the 10-year U.S. Treasury yield dropping to 1.68% from 1.83% in the week prior due to higher demand for the safe-haven asset. Internationally, equity markets broadly lost -1.1% last week, based on the MSCI All Country World Index (ex-U.S.).
The spread of the pneumonia-like coronavirus, which to date has resulted in almost 3,000 confirmed cases and 80 deaths, spooked global market participants due to concerns of how the outbreak may disrupt the global economy. Chinese officials have already placed travel restrictions on over 56 million of the population over the key Lunar New Year holiday. The outbreak has drawn some comparisons to the SARS epidemic that originated in China in 2003 and shaved an estimated 0.8% off of China’s GDP for the year, though the new coronavirus appears to be milder with a lower mortality rate. The World Health Organization has not yet declared it a global health emergency and Chinese administration has reacted with haste to lockdown its spread.
In corporate earnings news, 17% of the S&P 500 constituents have reported fourth quarter earnings so far with 73% of reporters beating earnings expectations and 67% reporting positive revenue surprises, according to FactSet. Given high valuations broadly, there is less room for error as companies that have fallen short of earnings expectations have seen larger than usual declines in their stock prices with an average drop of -2.8% in the days surrounding earnings reports.
The week ahead is chock-full of potential market moving events, including earnings results for several of the largest tech companies that have powered a large portion of market gains in the past year and the Federal Reserve meeting on Wednesday. Market participants generally do not anticipate any changes to the Federal Funds rate target (currently 1.5% to 1.75%), but they will be paying close attention to commentary around the recent expansion in the Federal Reserve balance sheet and whether that growth will continue and inject more liquidity into the market.
- Commodities: U.S. crude oil prices dropped -7.4% last week, their worst week since July of last year, amid the concerns of the global economic disruption from the coronavirus outbreak. Industrial metals also felt the sting of disruption concerns with copper prices slipping -4.9% for the week.
- Financial Conditions: The Chicago Fed Financial Conditions Index has fallen to its lowest point since 1994 indicating extremely easy financial conditions that have largely been attributed to the Fed’s rate cuts and balanced sheet expansion as well as the recent moderation in trade tensions.
US Economy – The Week Ahead
- Durable Goods Orders Month-over-Month Growth (Preliminary) – Consensus Estimate: 1.0%, Prior Month: -2.1%
- S&P/Case-Shiller Home Price Index Year-over-Year Growth – Consensus Estimate: 2.4%, Prior Month: 2.2%
- Federal Open Market Committee (FOMC) Meeting – Consensus estimate for no change in interest rates
- Initial Jobless Claims – Consensus Estimate: 213,000 (1.0% WoW), Prior Week: 211,000 (2.9% WoW)
- U.S. 4Q 2019 GDP Growth Year-over-Year (First Preliminary) – Consensus Estimate: 2.2% (1.8% QoQ), Prior Quarter: 2.1% (2.1% QoQ)
- Personal Consumption Expenditures (PCE) Index Year-over-Year – Consensus Estimate: 1.6%, Prior Month: 1.5%