It was a bit of a mixed picture for the markets as they started the year off strong, but selling late in the month erased the gains. So far, the S&P 500 has returned exactly… 0.0% for the year. The Dow is off 0.9%, while the Nasdaq is up 2.0%.
The selling was triggered during the first reports of the Coronavirus out of China.
Yes, the virus will put a damper on a lot of economic activity and will have an impact on the global economy. However, we think the decline in the market was more due to investors looking for an excuse to sell. The market had been very overbought (or expensive) after the strong run the market has had. The virus gave investors an opportunity to sell and lock in gains.
Here’s a look at some of the past epidemics. The font may be a little small, but you get the idea that any impact on the market is temporary.
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Aside from the Coronavirus, what was impacting the market this month?
First was the signing of the trade deal. While it’s not perfect, it is a positive first step in the right direction and better than the status quo.
The deal isn’t just about the Chinese buying more of our soybeans. The details haven’t been discussed much (mostly because we didn’t learn about them until late in the process), but the Chinese will be buying a lot more American items. In return, we gave up nothing. That’s a pretty good deal.
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The Fed also had an impact on the market, but to the downside.
It probably didn’t help that the Fed held their policy meeting this month during the height of the virus concerns. Their tone was measured, warning that the virus would weigh on global growth and sounding more pessimistic in general. Markets moved lower as a result.
However, the bad news is often good news from the Fed because it means they will continue to stimulate the economy. Right now they are printing money to buy bonds, which has helped prop up the market the last several months. Investors are also predicting the Fed will lower interest rates two times this year, which is another form of stimulus. These two items are likely to keep stocks elevated for the foreseeable future.
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Earnings haven’t gotten a lot of attention, but the results for fourth quarter earnings are underway.
So far, earnings are coming in about where analysts expected, down 2.1% over the past year according to Factset. It looks like this is the bottom, though, as earnings are forecasted to rise from here.
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Lastly, economic data this month was mixed, but leaned to the positive side.
GDP from the fourth quarter came in at a decent 2.1% growth.
Job growth remains solid.
It’s manufacturing that has shown weakness, lower again in December. However, an update to this manufacturing data was released this morning and showed a return to growth.
When we combine the manufacturing and service sectors of the economy, the picture looks to be improving, too.
The consumer side has been particularly strong. Sentiment indicators show considerable strength.
Small business optimism ticked slightly lower last month, but it still remains at a fairly high level.
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Where does the market go from here?
The selloff has put the market near attractive levels. That doesn’t mean the market can’t keep moving lower, but the odds of a rise are better than a decline.
As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
