Infection Reflection

Infection reflection.  Stocks slipped on Friday breaking a 4-day winning streak as investors contemplated the costs of the Coronavirus.  A strong jobs report was not enough to curb the selling.

N O T E W O R T H Y

• Heads or tails.  Investors have been trying to make heads or tails of the Coronavirus’ impact on the global economy and, more importantly, their investment portfolios.  Despite the daunting news which now includes confirmed cases at 40,614 and deaths related to the virus at 910, investors appear to be mostly sanguine about the outbreak’s effects on their portfolios.  Since news of the virus on Jan. 21st, stocks have had a bumpy ride but are still +0.20% higher, even after Friday’s selling. Many folks have been looking back at the markets’ behavior in past outbreaks and have been drawing comfort on the fact that markets were ultimately resilient in the mid-term.  While I myself have provided a similar analysis in my notes, I have cautioned that the global economy is different today than during the SARS outbreak.  The SARS outbreak was first discovered in February 2003 but was ultimately contained six months later in July of that year.  The initial market response was negative with the S&P500 giving up around -10%, but ultimately the market rallied around +13% by the time the virus was contained and added another approximately +13% by the year end.  Somewhat comforting, but let’s get some perspective.  Prior to the announcement of the outbreak markets were coming off of some tough times.  2002 was a tough year in which stocks gave up almost -25%!  In fact, the S&P500 had fallen by around -42% from reaching its peak in March of 2000 by the time the outbreak was announced. So as the SARS outbreak became a thing, the market was already heavily oversold with many value stocks appearing, well… quite valuable.  The market had just put the 2001 recession behind it and the economy was growing again.  Today, the economy is still growing with the last recession much farther back in the rear view mirror and stocks are constantly pushing all-time highs.  Regarding China and its importance to the world economy.  China is the second largest economy behind the US today, but it was only the sixth largest back in 2003 during the SARS outbreak.  In 2003 US imports from China were $152.4 billion compared to today’s $452.2 billion!  That’s an increase of +197%.  The fact remains that if the Chinese economy struggles, there will be an impact on the global economy.  Don’t believe me?  Just ask the Fed. In its report to Congress which was released last Friday, the central bank warned of economic risks resulting from the Coronavirus.  We will surely hear more about it this week as Chairman Powell addresses lawmakers on Capitol Hill tomorrow and Wednesday.
• It’s just science.  There has been much debate about climate change on Capitol Hill which all seems rather silly, so I won’t even get near that one. What I would like to highlight is that according to the folks that track this, the US and Asia are experiencing the warmest winters on record.  Fact.  Aside from the politics, what does that mean to us as investors?  Never mind the stinky skiing conditions and weakness in warm clothing sales.  Think of heating. Liquid natural gas prices are cyclical as you might guess, usually rising through winter and pulling back through summer.  This year the price of LNG is down by around -20% since the onset of winter!  Companies that have exposure to LNG include Exxon Mobile (XOM), Chevron (CVX), ConocoPhillips (COP), and British Petroleum (BP), to name but a few of the usual suspects.  What about heating oil?  It is down around -16% since the onset of winter, also its typical up-cycle period.  Who do you think produces that?  Same suspects.  On the brighter side of things, last Friday’s employment numbers came in above expectations with new hires reported at +216k. The growth includes a surge in construction hiring, which contributed 44k of those jobs (number 2 behind healthcare and education).  The reason for the surge?  Good weather. So despite the causes of warmer weather, there are impacts on your portfolio.  Fact.

THE MARKETS

Markets took a break on Friday, snapping a four-day winning streak as investors had some concern over the impacts of the Coronavirus, again.  The S&P500 traded off by -0.54%, the Dow Jones Industrial Average dropped by -0.94%, the Russell 2000 sold off by -1,23%, and the NASDAQ Composite Index slipped by -0.54%.  Bonds advanced and 10-year treasury yields fell by -6 basis points to 1.58%.  Crude oil resumed its fall, giving up -1.24%.

NXT UP

– Fed Governor Michelle Bowman, San Francisco Fed President Mary Daly, and Philadelphia Fed President Patrick Harker will speak today.

– This morning Avaya missed and Allergan beat estimates for earnings.  We will hear from DaVita after the closing bell.

– The week ahead will feature more earnings including sixty S&P500 companies. Economic numbers include JOLTS job openings, Consumer Price Index, Retail Sales, Industrial Production, and the University of Michigan Sentiment.  Chairman Powell will address lawmakers on Capitol Hill tomorrow and Wednesday.  Please refer to the attached earnings and economic calendars for details.

daily chartbook 2020-02-10

econ numbers 2_10

earnings releases 2_10