FINANCIAL MARKET UPDATE 1.28.2020

STORY OF THE WEEK

have stocks caught the coronavirus?

Coverage of the Coronavirus outbreak has been dominating headlines over the last few days, and the market seems to have taken notice. For the past several months the S&P 500 has steadily marched higher with very little volatility. That changed this Monday, when the index closed down -1.57%. The decline marked the first daily move exceeding +/- 1% since early October, ending one of the longest such streaks on record.

It is frightening to learn about a new virus that is spreading quickly and has no cure or vaccine. As of this writing, Coronavirus has claimed the lives of over 100 people, infected thousands more, and prompted the Chinese government to quarantine an urban area with a population comparable to New York City.  While the outbreak is undeniably having an adverse human impact, I question the idea that it will have a lasting effect on global stock prices.

To put this into context, consider the common flu (influenza). According to data from the Centers for Disease Control and Prevention (CDC), since 2010 the U.S. alone has had 9 to 45 million people contract influenza each year. Of those, 140,000 to 810,000 people required a visit to the hospital, and 12,000 to 61,000 have succumbed to their illnesses (each year!).  While the media focuses on the frightening new Coronavirus, influenza will likely have the larger impact.

Source: Centers for Disease Control and Prevention (CDC)  

Over the past 40 years we have seen more than a handful of viral scares. The table below, courtesy of MarketWatch, suggests the market impact of these events has historically been muted, even in the short-term. I’ll insert the generic disclosure here: past performance does not guarantee future results. It is certainly possible that Coronavirus will end up being a much bigger deal than these past episodes, though I’m not making that my base case.

In my view, the biggest ailment for the market is the fact that excessively bullish sentiment has pushed stock prices beyond what business results can justify (See the S&P 500 Trailing P/E chart in the Markets at a Glance section). When this occurs, the market generally becomes more vulnerable to a pullback. This is not necessarily a bad thing, however, as corrections are a normal and healthy development and can set the market up for continued gains. Pouring some cold water on investor sentiment may be just what the doctor ordered for your portfolio.  

WEEK IN REVIEW

  • Data published late last week showed an early estimate of January’s manufacturing sector activity, which declined to a three month low. The Manufacturing Purchasing Managers Index (PMI) fell from 52.4 to 51.7 (any reading above 50 signifies expanding activity). The Services PMI, however, accelerated from 52.8 to 53.2. The services sector is a much larger component of U.S. economic activity, and has offset weakness in manufacturing activity.
  • The Federal Reserve’s Federal Open Market Committee (FOMC) will conclude the first monetary policy meeting this week, with the policy announcement tomorrow at 1 PM CT, followed by Chairmen Powell’s post meeting press conference shortly after (you can stream it on Yahoo Finance). The market is not expecting any change to the current level of interest rates (currently at 1.5 – 1.75%).  
  • On Thursday we will get the first estimate of Q4 GDP. The Atlanta Fed’s popular GDPNow model is projecting growth of 1.9%, which would continue the trend of slowing growth that began in mid-2018.

HOT READS

Markets

  • What the 2020s Will Look Like For the Markets (AWOCS)
  • Ultrafast Trading Costs Stock Investors Nearly $5 Billion a Year, Study Says (WSJ)
  • Seth Klarman Passionately Defends Value Investing… (CNBC)

Investing

  • Here’s Why You Should Rebalance (MorningStar)
  • Why Invest? A 22-Year-Old’s Tough Questions About Capitalism (Zweig)
  • The Wager Revisited (HumbleDollar) Lessons from Warren Buffett’s bet against hedge funds
  • Big Mistakes, Don’t Make Them Yourself (Video) (Irrelevant Investor)

Other

  • The Buffett Formula: Going to Bed Smarter Than When You Woke Up (FarnamStreet)
  • SpaceX Crew Dragon Escapes Exploding Rocket (Heavy)
  • The 24 Stats That Explain Kobe Bryant’s Staggering Legacy (TheRinger)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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