Some Notable Events That Grabbed My Attention This Week

Market and economic news in the last week were dominated by a factor from outside the markets and economy: the coronavirus that’s spreading around the globe.

Also known as COVID-19, the virus has infected more than 82,400 people and killed 2,804 worldwide, as of Feb. 27, according to the New York Times.

The most important issue to investors right now is the virus’s effect on the global supply chain. The epicenter of the coronavirus is believed to be China, where roughly 78,500 of the known infections have occurred. The virus then spread through Asia. At least one case has now been reported in 50 different countries.

You’ve probably read reports analyzing the importance of Chinese and Asian production to the global supply chain and the adverse effects the coronavirus is having.

Because of the quarantines, travel restrictions and closures mandated in the face of the spreading virus, production and shipment of many goods stopped.

Companies are drawing down their inventories to continue producing, but that can’t continue for long before they run out of key parts. Some companies are issuing estimates of when they’ll run out of components.

If companies run out of inventories of components and can’t locate new sources, more production will stop. There will be layoffs and growth will slow further. The effect on technology companies would be significant.

It appears that March will be a key month. If production and other activities in Asia aren’t resumed sometime in March, the negative effects will be significant.

Market action indicates that investors expect the situation to continue to deteriorate. Investors are anticipating substantial reductions in earnings and global growth. The markets say that investors believe the coronavirus will be worse than other pandemics and non-market crises since at least 1990.

As usually occurs in these episodes, the markets were very calm following initial reports of the outbreak. Steep declines occurred on Monday after the World Health Organization issued a pessimistic warning and again on Tuesday after the Center for Disease Control followed suit.

If this episode follows the historic pattern, at what turns out to be the peak of the outbreak, markets will be priced for an indefinite continuation of recent events. Markets also won’t price in the potential for the outbreak to be arrested, followed by a recovery.

Yet, once the spread of the virus peaks, investment losses are likely to be made up quickly. Economic activity will ramp up to previous levels, and pent-up demand will increase activity.

While stocks tumble, bonds and gold are doing well. Interest rates on U.S. government bonds are at their lowest levels in 100 years. Gold is in a strong rally and testing key price levels. At the same time, stock prices have declined so much that most stocks are in what the technical indicators identify as oversold territory.

Before the recent decline, I cautioned investors not to get caught up in the investing momentum that was dominating markets. Instead, I urged diversification and balance and recommended having a margin of safety in all your investments. That’s still the way to make it through this period.

Don’t change your portfolio in reaction to the latest headlines and scare talk. Don’t confuse actual events with projections, hypotheticals and worst-case scenarios. You want to avoid being whipsawed when the turnaround occurs.

You also should consider the possibility that the coronavirus is not the real cause of the stock sell-off. The media and talking-head commentators always want to pin a market move on a single factor, but that’s rarely the case. There are other good reasons stock prices might be falling at this time.

On Saturday, before Monday’s market slide, Bernie Sanders won the Nevada Caucus for the Democratic presidential nomination. Over the weekend, many pundits were saying it would be hard to stop him from becoming the party’s nominee. The possibility of a socialist president is likely to make many investors uncomfortable.

Another factor is that stocks have been highly valued for a while. It doesn’t take much of a change to cause a wave of sales of highly valued stocks.

Also, while the stock indexes have been surging, most stocks haven’t been participating in the gains. The gains have been concentrated in five stocks. Some analyses have concluded that this has been among the narrowest concentrations of gains ever.

While the economy is growing, it isn’t growing rapidly and there aren’t any reasons to expect a surge in growth.

Stocks have been priced for an indefinite period of high profit margins and earnings growth. Investors might be recognizing that stocks at these prices are too risky. As economists say, investors are asking for a higher risk premium on stocks.

Business investment has been the weakest link in the economy for some time before the first news of the coronavirus. Many CEOs made it clear that they planned few new investments until there was more certainty regarding trade policy and global growth. The effects of the coronavirus increased the uncertainty about business investment.

Manufacturing was also frail, and the recent data is mixed. Some data give hope for a manufacturing recovery, but other data indicate manufacturing hasn’t reached a bottom yet.

In recent months the labor market reports, especially the JOLTs report, gave the first signs the labor market might be past its peak. Job growth slowed, and the number of job openings in the economy has been declining.

In the last few months, central bank leaders around the world made clear they’re worried about the next economic downturn. The bankers have exhausted their monetary tools and believe they won’t be able to effectively counter a recession.

Investors initially were happy about that, because it meant low interest rates and easy monetary policy for a while. Perhaps after thinking it over, investors concluded that impotent central banks aren’t a good thing.

While the coronavirus presents a significant risk to the global economy, it’s not the only risk out there. U.S. stock markets haven’t had a significant decline in more than 10 years. It likely took more than the coronavirus to trigger a fall.

Be sure your portfolio is balanced for a range of economic and investment outcomes.

The Data

The PMI Composite Index for February declined to 49.6 from 53.3. The February level of 49.6 is the lowest since the government shutdown in 2013.

The service sector index tumbled in February to 49.4 from 53.4. This is the first decline in the service sector in four years. The manufacturing index declined in February to 50.8 from 51.9. This is the lowest level for that index in six months.

The housing market continues to benefit from low interest rates.

New home sales surged by 7.9% in January. That’s the highest level for monthly sales since July 2007. Also, December’s sales were revised higher. Over 12 months, new home sales increased 18.6%.

Home prices are increasing, according to two indexes.

First, the S&P Corelogic Case-Shiller Home Price Index indicated prices nationally increased 0.4% in December. That comes to a 2.9% rise over 12 months. Prices in 2019 jumped in each of the 20 cities that are surveyed for the index.

Second, the FHFA House Price Index indicated that prices increased 0.6% in December, compared to a 0.3% climb in November. Over 12 months, prices are up 5.2% in this index.

The Pending Home Sales increased from the National Association of Realtors (NAR) increased by 5.2% to 108.8. Over 12 months, pending sales increased 5.7%. This is the second-highest monthly increase in the last two years.

Consumer Confidence, as measured by the Conference Board, increased a little in February, but only because January’s level was revised down. Initially, January’s index was reported at 131.6. This month, January’s level was revised down to 130.4.

February’s Consumer Confidence Index was 130.7. The current conditions segment of the index declined significantly while expectations improved a little. Despite the decline in current conditions, the level of that segment of the index still is positive.

The manufacturing surveys and data continue to report mixed results.

The Dallas Fed Manufacturing Survey resulted in a significant increase in its Production Index for February to 16.4 from 10.5. The General Activity also rose to 1.2 from a negative 0.2.

New orders declined in February, but keep in mind January’s new orders were a 15-month high. The outlook of business conditions in February was a little more optimistic than in January.

The Richmond Fed Manufacturing Index reversed course in February. It was reported at negative 2, compared to a 20 in January. The index was negative in November and December before turning around in January. In February, it returned to negative.

Despite the decline, businesses were optimistic that activity would improve in the coming months. Business also reported that they struggle to find workers with the necessary skills.

Durable Goods Orders had some positive signs. The headline number was a 0.2% decline in orders in January. But expectations were for a much larger decline, and December’s orders were revised higher.

A decline in aircraft orders was a major factor in the headline number. Excluding transportation, orders increased 0.9%. And core capital goods, an important indicator of business investment, increased 1.1% in January.

The second estimate of fourth-quarter 2019 gross domestic product (GDP) was unchanged from the first estimate of 2.1% annualized quarterly growth. There were no significant changes in the components of the estimate.

New unemployment claims increased 8,000, following a 5,000 rise last week. That puts the number of claims for the week at 219,000.

The Markets

The S&P 500 fell 7.93% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 8.01%. The Russell 2000 declined 8.25%. The All-Country World Index (excluding U.S. stocks) dropped 6.04%. Emerging market equities decreased 5.79%.

Long-term treasuries rose 3.24% for the week. Investment-grade bonds increased 0.27%. Treasury Inflation-Protected Securities (TIPS) added 0.62%. High-yield bonds lost 1.59%.

On the currency front, the U.S. dollar fell 0.48%.

Energy-based commodities tumbled 6.90% and broader-based commodities lost 4.84%. However, gold rose 1.43%.

Bob’s News & Updates

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