Market Strategy 2/10/2020
Riders on the Storm Revisited
Investors’ focus this week is likely to be on the implications of the coronavirus on economies and markets worldwide.
Key Takeaways
- Our experience tells us that as disconcerting as the spread of the coronavirus has been to date, the global focus on the illness is likely to produce a solution to stem its spread before long.
- Last week’s rally in global equities points to investors beginning to place the coronavirus in context of previous outbreaks of other deadly viruses.
- Economic data released last week underscored strength and resilience in the US labor market and pointed toward the sustainability of the US economic expansion.
- With 64% of S&P 500 firms having reported results in the Q4 earnings season, 74% of those have reported positive earnings surprises.
As we prepared to go to press on Sunday evening the number of confirmed coronavirus cases in mainland China had risen to 40,171 with the death toll at 908 as of the end of February 9. Of the 908 deaths thus far reported, 871 have occurred in Hubei province where the outbreak of the virus has been sourced to. So far there have been two deaths reported outside of the Chinese mainland: one in the Philippines and one in Hong Kong.
As worrisome as the news of the virus’s spread is with its cost to humanity and to society, for investors the questions are: how long will it take for the coronavirus to peak?; how long will it take health care professionals to find a vaccine or medication to stem the spread of the virus?; and, what will be the cost to business, labor, communities and governments before a method to stem the spread of the virus is found?
Recent history and our experience tells us that SARs, Ebola and Zika were effectively dealt with in a much shorter time than was projected at outbreak and with less damage to the regional economies directly affected and to the broader world economy than was feared in the period before medical researchers and other professionals arrived at an effective methodology to stem those maladies’ spread and heal those affected.
We view last week’s global rally in stocks as a market response to the earlier sell-off that had occurred around January 17 when the virus was reported and began to make headlines. Since then improved economic data and so far a better than expected Q4 earnings season stateside along with a sense of context placing the current virus in relation to other viruses in modern times provided some lift to stocks and indeed even to yields with the ten-year treasury yield rising from 1.507% on January 31 to as high as 1.651% on February 6. As of Sunday evening the ten-year yield had slipped to 1.595%, reflective of markets in early morning trading in Asia acknowledging the latest coronavirus numbers.
Over the weekend a number of technology companies were reported to be canceling plans to attend the MWC Barcelona Trade Show (the world’s biggest trade show for the mobile telephony industry) which is scheduled at the end of February.
When the Rubber Meets the Road
In our view portfolio diversification shines in challenging times with some parts of the portfolio serving as ballast to weather the storm in its immediacy while other parts offer dry powder—positioning for opportunities that surface— while other parts remain forward-facing—looking ahead to when the current disturbance exits the landscape. With diversification sensitive to an individual’s or an institutional entity’s goals, objectives, and risk tolerances, the capability to “stay the course” can be significant and ultimately rewarding.
We persist overweight equities versus bonds (see our global asset allocation model on page 10 of this report for details) with an overweight in US equities while maintaining meaningful exposure to developed and emerging international market equities. We continue to favor cyclical sectors over defensives on expectations that central banks will remain sensitive to both strengths and vulnerabilities within their economies. We also anticipate that solutions may be found sooner than currently expected to stem the spread of the coronavirus and heal those suffering from the illness. We also believe the market has not yet fully priced in the benefits to be derived from the phase one agreement between the US and China as the year unfolds.
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