Weekly Investment Perspective January 31, 2020

Market Summary

U.S. equity markets slid down further last week as the spreading coronavirus outbreak heightened concerns about a disruption to global economic growth. For the week, the S&P 500 lost -2.1% while the Dow and Nasdaq Composite fell -2.5% and -1.8%, respectively. Overseas, the MSCI All Country World Index (ex-U.S.) fell even further with a -3.2% loss on the week, and China’s Shanghai composite plunged nearly -8% on Monday, despite some intervention from officials to limit the selloff, after being closed all of last week for the Lunar New Year holiday. Amid the stock market volatility, investors increasingly sought out safe haven assets like U.S. Treasury bonds, as the 10-year Treasury yield dropped to just 1.52%, nearing 2016’s record low, compared to 1.68% in the week prior and 1.92% as of yearend.
The World Health Organization has officially declared the coronavirus outbreak as a “public health emergency” as the number of confirmed cases has risen rapidly to over 20,000 and the death toll has climbed to 425, with all but two fatalities occurring in mainland China. In an effort to contain the spread, about two thirds of China’s economy remains on lockdown, according to Bloomberg, which will likely have a notable impact on the nation’s economic output and its demand for international goods and services. The U.S., which now has 11 confirmed cases, has blocked all travel to and from China in an effort to prevent further spreading.
News of the coronavirus spread overshadowed other significant global events such as Britain’s official exit from the European Union on Friday after nearly four years of debate and political upheaval since the 2016 referendum. The near-term economic impact is expected to be limited as the U.K. now enters into an 11-month transition period to negotiate future relations with the European Union before losing any of its current privileges as a member nation.
In U.S. economic news, the first preliminary reading of 2019 fourth quarter GDP growth was mostly in line with expectations from a headline perspective with a 2.1% annualized growth rate, which was unchanged from the prior quarter. However, personal consumption, which was the primary driver of growth throughout most of the year, came in weaker than expected. The Federal Reserve also noted the moderating rate of growth of domestic consumption at its January meeting, but held the benchmark fed funds rate steady at 1.50-1.75%, as expected, and reiterated its stance that no change is warranted in light of solid job growth and inflation below the Fed target of 2%.
In the week ahead, market participants will continue to sift through fourth quarter earnings reports and will get an update on the U.S. employment picture, in addition to closely monitoring developments in the coronavirus outbreak. To date, almost half of the S&P 500 has reported quarterly earnings with the aggregate growth rate on pace for a better than expected +0.1% over the prior year. Around another 100 companies from the S&P 500 are set to report earnings this week.

Economic Highlights

  • Commodities: Oil prices continued to plummet last week on concerns of slowing demand due to the coronavirus outbreak with the WTI crude oil price per barrel falling -4.6% for the week. Crude oil prices are now down over 18% in 2020. Precious metals advanced during the week with gold prices increasing about 1.0%.
  • Inflation: U.S. inflation met expectations last week as core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, rose 1.6% year-over-year.

US Economy - The Week Ahead

Tuesday, 2/4/2020

  • Factory Orders Month-over-Month Growth – Consensus Estimate: 1.1%, Prior Month: -0.7%

Wednesday, 2/5/2020

  • ADP Employment Survey – Consensus Estimate: 153,00, Prior Month 202,000
  • ISM Non-Manufacturing PMI – Consensus Estimate: 55.2 (0.4% MoM), Prior Month: 55.0 (2.0% MoM)

Thursday, 2/6/2020

  • Initial Jobless Claims – Consensus Estimate: 215,000 (-0.5% WoW), Prior Week: 216,000 (-3.1% WoW)
  • U.S. 4Q 2019 Labor Productivity Quarter-over-Quarter (Preliminary) – Consensus Estimate: 1.3%, Prior Quarter: -0.2%

Friday, 2/7/2020

  • Hourly Earnings Growth Year-over-Year – Consensus Estimate: 3.0%, Prior Month: 2.9%
  • U.S. Unemployment Rate – Consensus Estimate: 3.5%, Prior Month: 3.5%
  • Nonfarm Payrolls Added – Consensus Estimate: 160,000, Prior Month: 145,000