Market Strategy 2/24/2020
How Long, How Long Has This Been Going On?
Markets likely to remain in a quandary while in the face of uncertainty about the coronavirus
Key Takeaways
- Supply chain risk and an increase in the spread of the coronavirus outside of China are key points of focus for investors this week.
- With 88% of S&P 500 companies having thus far reported Q4 results, nearly 74% have reported upside surprises with earnings growth up 1.2% on back of 3.6% revenue growth.
- Last week’s economic data showed a sharp upturn in the Conference Board’s Leading Index, boosted by a strong gain in building permits and stocks prices. Housing starts continued to show strong activity as interest rates remained low and the labor market remained strong.
- Worries about global growth and fears of pandemic pushed stocks lower around the world last week.
Just as the coronavirus appeared to be losing momentum last week within China the number of reports of the virus’s spread outside its borders ticked higher— unsettling investors who had begun to expect an imminent solution to the outbreak. According to Reuters, the virus has claimed the lives of 2,442 people in China, and that country has reported 76,936 cases. Over the course of the last few weeks the virus has spread to some 28 other countries and territories, with the respective death toll around two dozen, also according to Reuters.
Equity markets came under pressure towards the end of last week as a result with investors increasingly focused on China/coronavirus global supply chain risks among their equity portfolio holdings. Among stocks which have come under pressure of late are cruise lines, airlines, athletic shoe manufacturers, technology hardware makers, materials companies, industrial manufacturers, certain luxury goods manufacturers, and energy companies exposed to a China-centric global supply chain.
At this juncture we’d consider it a little late to get defensive and think it best for investors to right-size expectations near term while health officials search for a solution to stem the spread of the virus as the illness runs its course to peak.
The good news is that the momentum of the virus appears to be peaking in China. The bad news is that coronavirus is picking up momentum outside of China in both greater Asia and as far away as North America, Europe, and the Middle East. Among the countries caught in the headlines tied to the virus’s spread as of the end of last week were: Japan, South Korea, Singapore, Italy and Iran.
On Saturday the World Health Organization said it was worried by the detection of infections without a clear link to China.
Keeping things in context should provide some comfort from an investment perspective as the vast majority of cases reported and deaths thus far have been within China where the virus originated.
That said, beyond the human tragedy and social disruption that the virus has caused thus far it presents a risk to economic growth and corporate earnings. The longer the virus runs and the bigger its footprint around the globe the more worrisome it becomes.
The chair of the International Monetary Fund said that China’s growth this year would likely be 0.4% lower (at 5.6%) and that this could trim global growth by about 0.1 percentage points.
Flight to “Safe Havens” Sends Bond Yields to New Lows
The bond market has reacted as one might expect—pushing the yield on the 10-year US Treasury near record low levels and indeed the yield on the 30-year US Treasury bond to a historic record low. At these levels bond prices look rich to us.
Major stock indices stateside have taken a trim (if not yet a haircut) and some sectors and individual stocks with supply chain risk have felt the coronavirus effect more than others.
Gold and the US dollar as safe haven currencies have strengthened with gold hitting a new high for the year at $1643 on February 21, but still not near its record high of a few years ago ($1900.20 on September 5, 2011).
The S&P 500 moved 1.25% lower last week, declining in three of the four trading sessions in a holiday abridged week.
The week ahead will likely find investors parsing the nearterm effects of supply chain risk in their portfolios and the spread and momentum of the virus globally.
Aided by 21st century technology, biotechnology, modern pharma solutions, diagnostics and considerable experience as a professional community in dealing with global virus risk over the past 20 years, our expectations are that global health authorities will navigate this latest set of challenges effectively if not as soon as Main Street and the markets would like. When the current pandemic risk has been met and put behind us on the timeline of history hindsight will likely tell us that the opportunities outweighed the risks.
For now, we suggest that investors begin to seek out “babies that get tossed out with the bath water” and make shopping lists of stocks that might have “gotten away earlier” in a period of upward momentum.
Diversification remains key in our view across asset classes. Within equities, companies with solid management and business plans with prospects for capital appreciation (further down the road) along with sustainable dividends in the near term appear attractive to us. “Getting paid while you wait” is what the age old appeal of investing in dividend-paying stocks is about, especially in times like these.
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