Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
Panicked investors continued a major sell-off last week, pushing stocks to double-digit losses. Fears of a major global economic impact increased as the coronavirus continued to spread across multiple countries. By the end of last week, each of the major benchmark indexes listed here fell by more than 10%, headed by the Dow, which lost close to 12.5%. Following the Dow were the small caps of the Russell 2000, the S&P 500, the Nasdaq, and the Global Dow. Money flowed from stocks and into long-term bonds. The yield on 10-year Treasuries plummeted 35 basis points to 1.12% as bond prices soared. The price of oil was also hit hard, falling more than $8 per barrel by the end of last week.
Oil prices plunged last week, closing at $45.19 per barrel by late Friday afternoon, down from the prior week’s price of $53.35. The price of gold (COMEX) fell back last week, closing at $1,585.80 by late Friday afternoon, down from the prior week’s price of $1,646.10. The national average retail regular gasoline price was $2.466 per gallon on February 24, 2020, $0.038 higher than the prior week’s price and $0.076 more than a year ago.
S&P 500: 2954 (down 11.49% for the week and down 8.56% for the year)
NASDAQ: 8567 (down 10.54% for the week and down 4.52% for the year)
Dow: 25409 (down 12.36% for the week and down 10.96% for the year)
US Treasury 10yr: 1.12% (from 1.47% last week)
Crude Oil (April): $44.76 (from $53.38 last week)
Gold (March): $1,566.70 (from $1,648.80 last week)
USD/Euro: $1.1027 (from $1.0846 last week)
by Betsey A. Purinton, CFP®, Managing Partner and CIO
The recent downturn in the markets has been driven predominantly by the Coronavirus and high stock valuations. Any sustained market bounce is unlikely to take place before the risks presented by Covid-19 have abated. At the same time the economic impact of the virus is undergoing extensive assessment and review.
In terms of the economy, we do know that there are supply chain interruptions hitting technology firms, transports, manufacturers, auto makers, retail businesses, and other businesses. We also know Covid-19 is starting to reduce demand for certain consumer expenses, as individuals react to the possibility of staying home.
The good news is that the corporate climate going into this crisis has been strong, with inventories relatively high and balance sheets healthy enough to withstand a temporary slowdown in business.
Since it is difficult to know exactly how soon we will have clarity on any rebound, we thought we would take this opportunity to discuss how the major players in the economy are reacting to the crisis and how they could help a rebound on the other side of this slowdown.
First – Some Market Reminders
It is a common tenet that the stock market tends to anticipate the worst when worries arise. That often translates into selling before important facts are known and confirmed. There is also another market expression that advises “Don’t try to catch a falling knife.” Both of these presumptions help to explain why the market fell so fast last week.
The Short Term and the Long Term
- The Government: The government’s best efforts right now are, and should be, directed towards shoring up the healthcare system. By ensuring adequate supplies and medications, trained medical personnel, sufficient respiratory equipment and enough spare hospital beds, the government can strengthen public confidence and allow the country to feel that the crisis is manageable. Supplemental appropriations targeted at the medical system by Congress is equally important. In addition, consumers deserve transparency and scientific explanations from all levels of government (local, state, national) to inspire trust in how the crisis is being administered. This should not be a tall order, given the level of expertise, resources and potential funding in our economy, but it does require coordination, openness and a willingness to work together.
- Consumers: In the short term, consumers could pull back on personal spending on such items as travel and leisure, gasoline and big-ticket items, as a portion of the populace hunkers down in waiting mode. Feeling safe and prepared are very important motivations. But so too is the desire to continue a normal life. The impact of the virus on consumer spending will likely depend on how pervasive the Coronavirus becomes.
However, in the future, there could be a healthy rebound in spending and in the markets when the Coronavirus threat recedes, and pent up demand is released. And even if consumers reprioritize their behavior in the longer term, opportunities will exist for innovation and business ideas to enter the markets in response to these changes.
- Companies: In the short-term, companies traditionally respond to crises by watching their bottom lines. This can result in temporary cutbacks in employee working hours, plants closings or slowing services. These actions are already being anticipated by the markets in their assessment of first quarter and second quarter earnings estimates. Lower earnings can translate into lower stock prices, as we have seen.
However, in the longer term these same businesses aim to be fully staffed and ready to ramp back up again when the impact of the coronavirus fades. In other words, profits may be hit (and hence the markets too) in the coming months. But well-positioned companies will try to hang onto their employees, develop new access to needed resources, and protect their capacity for growth, all of which are critical components of a company’s future success.
- Federal Reserve: The Federal Reserve, through its policies of lowering interest rates and pumping money into the economy, has been the backbone of the decade’s long recovery since 2008. On Friday Fed Chair Jerome Powell signaled that the Fed will “act as appropriate to support the economy.” That is likely to be another interest rate cut, potentially at the March meeting.
It should be noted that the Federal Reserve may not be very helpful in the short term for the current situation. The greatest impact of interest cuts is felt 6-9 months after a rate cut has been made, not in the very near term. However, a Fed rate cut could encourage a market floor inspiring a bit more confidence in investor buying, and the housing sector could get a further boost though lower mortgage rates. The Fed will likely calculate that any move it makes may help calm the markets even if the greatest benefits are delayed.
- Investors: Last week there were few buyers in the market, as investors were reluctant to bet on stocks until market carnage is over. (Hence the avoidance of catching a falling knife). Without buyers, the selling by programmed/leveraged sellers and short-term traders tends to progress uninterrupted causing stock prices to cascade even lower. At some point (called “capitulation”) the sellers become exhausted and the savvy investors turn into opportunists. In other words, an overvalued market eventually becomes an undervalued market, as those who have been out of the market venture back in.
Recall that as recently as the fall of 2018 the stock market descended 20%. Then on December 24th it reached a tipping point – sellers had sold all they wanted to, and the market turned around. Buyers came back, the news on the trade and interest rate front turned positive, and the markets were bid back up to their September 2018 high by the end of April 2019.
Whether 2020 will see a turnaround as sharp as the one in 2019 remains to be seen. It is too early to assess the total economic damage of Covid19, meaning that there could be more pain to portfolios. To get to a turnaround: governments need to inspire confidence: consumers need to feel comfortable with any risks they take; companies need to rethink their business plans; the Fed needs to decide if it wants to act; and investors need to remain calm. For Covis-19, we sincerely hope that all of these basic steps will come quickly together to carry us through the downturn and into a market recovery.
Reports on the manufacturing sector kick off the week. Purchasing managers reported some growth in new orders and production in January, but manufacturing has been generally weak for quite some time. On the other hand, employment has been solid with 225,000 new jobs added in January. It will be hard to top that total in February. Average weekly wages grew 3.1% over the 12 months ended in January. Investors will no doubt be watching the coronavirus to see if it continues to spread and its effect on global supply chains.
Are We Concerned Yet?
This week’s two-day 1910-point drop in the stock market has unnerved some investors. Read our current take on the markets by our Chief Investment Officer, Betsey A. Purinton, CFP®.
Why the Stock Market Cares So Much About the Coronavirus
For the last few weeks, it feels like the stock market has been responding to every new piece of information around the coronavirus. Read Derek Amey’s blog to learn how severe the economic impact of this virus could become.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.
Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. Part of this content contributed by Forefield, Inc.