Monthly Investment Review — January 2020 Feb. 3, 2020
The stock market was roughly flat in January, as gains made in the first half of the month were offset by price declines in the second half, amid growing concerns over the outbreak of the deadly coronavirus in China. For the month as a whole, the S&P 500 declined by -0.2%, while the Nasdaq rose 2.0%.
Bond prices made significant gains for the month, as the yield on ten-year Treasuries declined from 1.92% to 1.52%. In fact bonds outperformed stocks in January, as some long-term bond funds advanced by 7.0% or more for the month. The price of oil dropped sharply, falling from roughly $61 to $52 a barrel, due to worries about a slowdown in travel and a potential slowdown in the global economy from the virus.
Figure 1 S&P 500 index – Stocks were roughly flat in January 2020
Other major issues affecting the markets in early 2020 included tensions with Iran, the completion of major trade deals, strong economic data, and fourth quarter earnings reports.
Tensions with Iran
As the year began, markets were rattled by news that a U.S. airstrike had killed a top Iranian general in Iraq, after an attack on the U.S. embassy. This led to worries about retaliation by Iran and an escalation in U.S. – Iran tensions which could possibly lead to war. On the evening of January 7th, Iran fired missiles at bases in Iraq which housed U.S. troops, but there were no casualties. President Trump made a television address which served to de-escalate the situation, as the U.S. increased economic sanctions on Iran, but did not take any additional military action. With the risk of war greatly reduced, investors breathed a sigh of relief, paving the way for the market to climb higher into mid-January.
Trade Deals Completed
On January 15th, Phase I of a U.S. – China trade deal was signed in a ceremony at the White House. This was a historic deal which may provide a framework for a new, more positive relationship between the U.S. and China, as it should lead to increased trade and investment between the world’s two largest economies.
The deal includes plans for China to buy an additional $200 billion of U.S. goods over the next two years, including $40 – $50 billion in agricultural products. Over time, the deal should lead to a substantial reduction in the U.S. trade deficit with China. China also made substantial commitments to stop the theft of U.S. intellectual property and the forced transfer of technology, and the deal includes a fully enforceable dispute resolution process. Some tariffs on Chinese goods were reduced, but tariffs remain in place on other products, giving the U.S. leverage in the Phase II negotiations.
Shortly after the China deal was signed, the Senate passed the U.S. – Mexico – Canada Agreement (USMCA) with strong bipartisan support, replacing the old NAFTA trade deal. The net result of these trade deals should be more job creation in the U.S. and an increase in U.S. economic growth. The two trade deals could bring the growth rate of the U.S. gross domestic product (GDP) up from its recent 2.0% range closer to the 3.0% range for 2020.
Now that these trade deals have been completed, the Trump administration’s trade team will focus on negotiating with Europe and the U.K. A new trade agreement with the U.K. is likely following Brexit, which was completed as January came to a close.
On another note, the President’s impeachment trial took place in the Senate in the second half of January, but as the month ended, the outcome appeared to be that the President would be acquitted in early February, and the proceedings had little or no impact on the markets.
Economy and Earnings
Economic reports in January were generally strong. The ADP jobs report released on January 8th showed a gain of 202,000 private sector jobs, the unemployment rate remained extremely low at 3.5%, and a report released in mid-January showed that retail sales for the 2019 holiday season were up 4.1% from the prior year, a sign of robust consumer spending. Consumer confidence was very strong and housing starts rose to their highest pace since 2006. Preliminary data showed that fourth quarter GDP growth was 2.1%, while inflation remained very low.
Corporate earnings reports for the fourth quarter began in mid-January, and generally have been stronger than expected. Of the companies that have reported earnings so far, more than 70% were above expectations. Stocks with notably strong earnings reports included Microsoft (MSFT), Intel (INTC), Apple (AAPL), Amazon.com (AMZN), and electric car maker Tesla (TSLA).
Coronavirus in China
As mentioned above, the outbreak of the virus caused a market selloff in late January. On Monday, January 27th, the Dow Jones Industrials fell by over 400 points, on news that the virus was spreading rapidly and had already caused roughly 100 deaths and thousands of illnesses in China.
Then on Friday, January 31st, stocks plunged again, with the Dow down by more than 600 points, as the virus outbreak became a more serious problem with global implications. The U.S. Secretary of Health and Human Services declared that the virus presents a public health emergency in the U.S., following an earlier declaration from the World Health Organization stating that the outbreak was a global health emergency.
The director of the Centers for Disease Control said that the risk to the U.S. public is low, but the federal government will need to take action to keep the virus under control, and will respond to the public health crisis with coordinated action by multiple government agencies. Travel restrictions were put in place and anyone returning to the U.S. from China will be subject to a mandatory 14-day quarantine.
Conclusion
The coronavirus has created a cloud of uncertainty over global financial markets. The virus is already affecting China’s economy and could have an impact on the global economy. The situation has caused a move toward a “risk off” environment (stocks under pressure, while bonds benefit from a flight to safety). However the virus is not the only issue affecting the stock market, and other factors are generally positive. The U.S. economy remains strong, recent earnings reports were above expectations, inflation remains low, and interest rates are very low.
As seen in the chart above, the S&P 500 made very strong gains over a period of almost four months, beginning in early October 2019. Therefore by mid-January it was quite overbought and overdue for a pullback. In late January it dropped by roughly 3% – 4%, but a deeper pullback is possible, especially if the public health crisis worsens.
Thus at this time we are adopting a cautious policy and will continue to assess the situation as news unfolds. Given the strength of the economic fundamentals, our long-term market outlook remains positive, and in general, we believe that market corrections will turn out to be buying opportunities.
Jonathan Strauss, CFA
jon@straussresearch.com
513 – 379 – 2792 (cell / text)