Monday Musings: January 27, 2020

Jan 27, 2020

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Public Trust Credit Team
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Pandemic panic? Equity markets around the world sell off on rising fears of the coronavirus outbreak and its potential spillover effects on the global economy

Concerns surrounding the containment of the coronavirus and its potential economic impacts have rattled global stock indices over the past week as detection of infected patients has spilled over into the U.S., Australia, and now France. All major stock indices across the U.S., Europe, and Asia/Pacific opened the morning lower, while U.S. Treasuries and other ‘safe-haven’ assets have experienced a massive rally as investors rush towards flight to quality trades. Monday’s early trading hours saw the benchmark 10-year U.S. Treasury yield decline 7 basis points to 1.61%, its lowest level since October 2019. Public health officials in China’s Hubei province have warned that the virus is growing more and more contagious with reports that the disease has infected at least 2,800 people to date and that the figure could spike by another 1,000 by the end of the week. The Chinese government has imposed restrictions on travel in the Hubei province, and investors are bracing for a knock on first quarter Chinese GDP as the virus poses serious threats to the country’s travel, luxury, mining, and manufacturing sectors. The outbreak is expected to weigh heavily on consumer spending and manufacturing production as citizens are encouraged not to leave their homes and millions of laborers are still not yet permitted to return to work. The rapid spread of the coronavirus further dampens the economic growth outlook in China and the country’s subsequent demand for industrial commodities as the world’s largest energy consumer. Oil prices have slumped meaningfully over the past week with Brent Crude falling below $60/barrel for the first time since October 2019.

A Wall Street Journal report suggests that the Fed will let markets run, much to the delight of investors

Ahead of the Federal Reserve Board meeting this week, the Wall Street Journal published an article suggesting that “Fed officials are all but certain to leave their target range on overnight rates on hold. Nor do they seem likely to do much of anything in the months ahead,” and ties the decision to the Fed’s ongoing review of inflation targeting. The article is not necessarily surprising, but publishing such a report suggests that the view could be market orthodoxy. Ultimately, it is just an additional indication of a bullish view on the investment market for 2020. These views often change, sometimes just as soon as they get published. That said, market participants are likely to retain their generally optimistic views at least for a few weeks.

U.S. Corporate earnings start in earnest this week, giving a first look at 2020 expectations and how 2019 played out

Full-year earnings for the S&P 500 in 2019 are expected to be flat or barely up with a consensus of -1% earnings growth for Q4 and positive 1% growth for the full year 2019. The expectation is upside in certain sectors like consumer and technology that are buoyed by strong consumer spending and a tariff reprieve from the limited U.S./China trade deal. However other sectors, such as industrials and oil & gas, have greater potential for missing market consensus as these sectors continue to digest the slowdown in manufacturing and the reprieve from trade uncertainty. Undoubtedly, this earnings season will be important for the 2020 outlook with a key focus on company guidance as earnings progress. Isolated capex and R&D spending are key areas of focus for the coming year with the current expectation for slightly higher run rates going forward into 2020. Sectors such as technology have already shown strong performance and an increase in spending, while industrials spending guidance will be a key point for manufacturing activity expectations for 2020. In the oil & gas sector, general market expectation is for meaningful year-over-year earnings decline with some market participants expecting OPEC to continue cutting production in 2020 in attempt to manage oversupply in the oil market. The current outlook for pharmaceuticals is continued consolidation trends with a stable appetite for M&A going into 2020 and steady R&D spend.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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