In one corner you have all the power of Wall Street. In the other, there’s a microscopic virus. It’s unclear who’s going to take this round, but the virus arguably won last week.
It’s kind of ironic to think a tiny virus could stop the market in its tracks, with sharp losses in pre-market trading Monday. It’s also surprising that just when a lot of people thought China would leave the front pages with the trade deal, another China issue starts ganging up on stocks and sending investors back into caution mode. Bonds rallied sharply early Monday, taking the 10-year Treasury yield down to a four-month low of 1.62% and also slamming crude prices.
While you never want to overlook the unfortunate human impact of something like the coronavirus, it’s important to keep things in perspective. The virus could potentially get worse, but at this point there’s only a handful of U.S. cases and around 2,700 cases worldwide. Hopefully it gets contained and the market can go back to other things.
Selling from panic is never a good idea, just as it’s usually a bad idea to buy simply because stocks are rallying. It’s a volatile market at this point, so anyone thinking of getting in should consider keeping trade sizes down and being a partial buyer. From a technical standpoint, it’s important to see if the S&P 500 Index (INDEXSP: .INX) can hold 3240.
All of this is threatening to overshadow a Fed meeting starting tomorrow (more below) and a vital earnings week. The virus’s impact on markets shows how China’s issues boomerang around the world. As we pointed out last week, things have changed a lot since the winter of 2002–2003, the last time there was a major viral outbreak from China. The country is a much bigger elephant in the room now.
China’s 2003 GDP of $1.66 trillion was about 14% of U.S. GDP, according to the World Bank. By 2018, China reported GDP of $13.37 trillion, about two-thirds as large as U.S. GDP. Also, a lot more people here and around the world have exposure to the Chinese economy than they did back then, so a virus and its impact are harder to isolate for the average investor.
If you think your portfolio doesn’t have China involved, check it again. If you own Apple Inc (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Caterpillar Inc (NYSE: CAT), Tesla Inc (NASDAQ: TSLA), just to name a few, you’re exposed. By the way, most Asian markets, including in China, are closed today for the Lunar New Year.
A product that might benefit from the virus is antiviral facemasks, which are reportedly selling out right now in parts of the country. Some of the main brands are sold by 3M Co (NYSE: MMM) and Honeywell International Inc. (NYSE: HON).
Earnings Heat Up
It’s going to be a crazy week for earnings, but many of the big hitters don’t come to bat until Tuesday. Pifzer Inc. (NYSE: PFE), and Lockheed Martin Corporation (NYSE: LMT) get things started Tuesday morning, and then it’s AAPL in the afternoon. AAPL is such a global bellwether that its results could help shape the entire market’s tone for the rest of the week, barring some kind of Fed surprise or worse news on the virus front. Advanced Micro Devices Inc. (NASDAQ: AMD), a closely-watched chipmaker, also reports tomorrow after the close.
Things don’t get any lighter later this week. The schedule reads like a laundry list of the most closely watched corporate names, with AT&T Inc (NYSE: T), Verizon Communications Inc. (NYSE: VZ), Boeing Co (NYSE: BA), Facebook Inc. (NASDAQ: FB), McDonald’s Corporation (NYSE: MCD), Microsoft Corporation (NASDAQ: MSFT), Tesla Inc. (NASDAQ: TSLA), CocaCola (NYSE: KO), General Electric Company (NYSE: GE), Amgen, Inc. (NASDAQ: AMGN), Starbucks Corporation (NASDAQ: SBUX), Caterpillar Inc. (NYSE: CAT) and Amazon.com, Inc. (NASDAQ: AMZN) among the sluggers in the lineup. It’s definitely not a week to miss, and by the time it’s over, we’ll be about 40% of the way through earnings season. Also, 80% of the “FAANGs” will be done reporting.
People might want to pay close attention to AAPL and AMZN for a better handle on how the holiday shopping season went. Some earlier numbers from Target Corporation (NYSE: TGT) and department stores didn’t look too shiny. TSLA, whose rally has been nothing short of hyperbolic, could also be interesting as investors wait to find out if it can build on the positive results its last time out.
The 85 members of the S&P 500 that have reported results so far have seen net income fall by 0.3% on average from a year ago, MarketWatch reported over the weekend. However, one-third of those companies are in the Financial sector, so that single-sector concentration could skew the number. The FactSet consensus currently calls for Q4 net income to fall by 1.9% for the S&P 500.
Guidance remains the key factor for everyone reporting. We’re in a market where people want to see a glowing picture going forward. While stocks are having a tough time now with coronavirus, things could potentially improve if any of the big companies reporting this week give great forward-looking statements.
But wait—there’s more. We’ve also got the government’s first read on Q4 gross domestic product (GDP) coming up this Thursday. The next day brings personal consumption expenditure (PCE) prices, which economists say is the Fed’s preferred inflation metric. The data kick off today with new home sales for December soon after the open.
A whole lot of nothing. That’s what most people will probably tell you if you ask them what the Fed might do this week.
While it’s true the Fed doesn’t seem likely to make any rate moves at its meeting that ends Wednesday, to say it’s doing nothing ignores what it actually is doing. Though the Fed doesn’t want anyone to call its strategy “quantitative easing,” the fact is since last fall it’s been pumping money into the market, and it’s probably no coincidence that this began just as stocks started galloping higher.
Stocks have been on a rampage since October, but took a breather last week. It’s possible trading could be a bit muted Tuesday and early Wednesday ahead of the Fed decision. At this point, the futures market points to an 87% chance of no rate move and about a 13% chance of a 25-basis point rate hike. Let’s just say a hike here would be unexpected and leave it at that.
It's also possible Fed Chairman Jerome Powell might have remarks about the potential economic impact of the virus, and be asked what the Fed would be prepared to do if things get worse.
Crude oil continues taking it on the chin, falling below $53 a barrel to three-month lows, and that’s hurting Energy stocks. This virus is bad news for crude because people might start traveling less, especially with 15 Chinese cities under travel restrictions affecting 57 million people, according to Investor’s Business Daily. Resort, airline, and casino stocks also came under pressure last week. Copper, which tends to reflect manufacturing demand, is getting hurt.
Rally Meets Virus
Friday was a gut-punch for a market that hasn’t taken many lately. The nearly 1% decline put the SPX back down below 3300, a point where analysts had seen some technical support. The failure to claw back above 3300 before the close could conceivably point to more weakness from a technical standpoint as the new week begins.
The SPX ended up falling about 1% for the week, its first weekly loss since the first week of the year after an amazing start to 2020. Friday was its worst session since October. The Russell 2000 (INDEXRUSSELL: RUT) was the laggard, down 2% for the week and still having a really rough time.
CHART OF THE DAY: ROUGH DAY AT THE OFFICE: The 10-year U.S. Treasury yield (TNX—candlestick) fell below 1.7% on Friday for the first time since October, and volatility (VIX—purple line) zoomed up. Both appeared to be reacting in part to coronavirus fears. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Crumbling Crude: Just a few weeks ago there was talk that crude might flirt with $70 a barrel, and now people are wondering if it can get back to $55. That’s not a good place for Exxon Mobil Corporation (NYSE: XOM) or other oil companies to be. Fears of travel slowing in Asia due to the coronavirus weighed on crude last week, but so did an international agency report saying there’s one million barrels a day of excess crude output worldwide. The question now is whether OPEC will decide to cut production again. The organization’s next meeting is March 5.
In case you’re wondering, it’s been just over a year since crude last fell below $50. Crude really fell out of bed Friday back to late-October lows as coronavirus fears mounted. The fact that cases are starting to crop up in the U.S. might raise concern about how authorities here will respond, especially when you think about airports and travel. Airline stocks might feel more pressure if this starts accelerating.
Utilities Still Among Front Runners: Stepping back to look at the bigger picture three weeks into the new year, the best performing sectors so far in 2020 are Technology, Utilities, and Communication Services, in that order. At the bottom of the list are Energy and Materials. It’s interesting to see Utilities holding their own with the big guys (Technology and Communication Services), but consider that there’s still a lot of defensive thinking around, which might help so-called “defensive” sectors. Though Utilities are near all-time highs, there’s also a sense that cyclical stocks have had so much love that maybe some investors feel like turning their attention to some of the less hyped parts of the market. With bond yields this low, Utilities arguably could be a decent yield play. The SPX had a dividend yield of around 1.8% on Friday, a decent premium to 10-year Treasury yields. Many Utility stocks have much higher yields.
Yield Fears Hit Banks: Virus fears and a weak U.S. manufacturing number Friday from a private forecaster have helped push the 10-year Treasury yield back under 1.7%. The spread between two-year and 10-year yields fell to 20 basis points by the end of last week as the 10-year yield continued falling more sharply than two-year yield. The yield flattening put pressure on bank stocks late last week, with some of the recent market darlings like JPMorgan Chase & Co (NYSE: JPM) taking the brunt of it. Discover Financial Services (NYSE: DFS) really got whacked, falling 11%. Also, Synchrony Financial (NYSE: SYF) fell nearly 10%. Not only were earnings disappointing, but revenue also slipped. When the yield curve is working against you, you’re going to get punished if you slip up elsewhere.
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