Market Strategy 1/21/2020
As the World Turns
As US investors return from a long weekend, there’s much to consider both positive and worrisome.
Key Takeaways
- Earnings season moves ahead with several bellwether names in technology, consumer staples, health care and industrials reporting this week.
- With equity markets stateside and around the globe having moved higher since mid-December when the Phase One agreement was announced, stocks are vulnerable to a “trim” or a “haircut” on bad news.
- This week we look at relative performance over the past five years of aerospace and defense sector ETFs versus the broader US indexes.
- Last week’s economic data pointed to decent retail sales and moribund inflation pressure.
Investors can expect plenty of action in the holiday abridged week in the US that starts today as Q4 earnings season gathers momentum and global billionaires and world leaders meet in Davos, Switzerland to share ideas and discuss the state of the world and global economic outlook. The world’s financial press will provide detailed coverage of the annual event that should garner considerable attention from investors worldwide.
As China prepared for its annual Lunar New Year celebration which kicks off on Saturday, January 25 worries increased about the potential spread of a virus that has been reported in the press as contagious between humans and has killed four people.
It has been estimated that over two hundred million people in China travel long distances to visit family, friends and historic sites during the annual holiday adding to concerns that are customary when news of a serious new illness breaks. As we go to press on Monday evening markets in Asia were moving towards a “risk off” posture on health risk concerns that reminded some observers of the period when SARS was a prevalent worry in 2003 into early 2004.
Stateside the calendar moves closer to President Trump signing the USMCA (“new NAFTA”) trade deal which was approved last week by the Senate.
Equity markets that have moved higher globally on the recent progress made toward ameliorating the trade fracas have also raised concerns among some investors, skeptics, and bears that stocks may get ahead of themselves if they haven’t already.
From our perspective markets are always vulnerable to a “trim,” a “haircut,” or even a pullback after a celebratory run up like the one we have seen since the phase-one agreement was announced and after its signing last week. That said, we’ll keep our eye on the fundamentals (both economic and corporate), which in our estimation continue to be improving.
While there has been a sense that a measure of capitulation has occurred among some “perma-bears” and skeptics of the most unloved bull market we can recall, there’s still a hefty and healthy crew of doubters bad talking stocks as they climb the proverbial wall of worry without much evidence in our view of animal spirits or irrational exuberance.
The Fed and other central banks remain sensitive to both signs of growth as well as to vulnerabilities on the economic landscape and interest rates remain near historical lows stateside and in many other countries as signs of inflation that would justify interest rates moving considerably higher and sticking fail to surface.
The good news is that even as fundamentals improve modestly there’s plenty of worry in and around the markets to keep traders and investors on their toes and short on complacency.
We continue to favor cyclicals over defensive sectors, remain overweight US equities while maintaining meaningful exposure to international developed and emerging market equities. (See pages 9 and 10 of this report for further details on our global asset allocation and the box at right for our suggested S&P 500 sector weightings).
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