Market Summary — Week ending Friday 2/7/20
S&P 500 3328 +3.2% for the week 10-year Treasury yield 1.58%
Global Macro News
Political
President Trump’s State of the Union speech was viewed as successful, highlighting the strength of the economy. The Senate impeachment trial came to an end as the President was acquitted. Gallup polls show growing approval ratings for the President, high levels of confidence in the economy, etc. The Democratic party appears to be somewhat disorganized.
Geopolitical / Trade / Global Economy
The coronavirus in China remains a major issue, even though it was overshadowed by U.S. domestic politics for most of the week. Hundreds dead and thousands infected in China, but official reports may vastly understate the death toll. Entire Chinese cities locked down.
This could have a major effect on China’s economy – GDP growth could slow to 1%. Beijing is implementing stimulus measures to help the economy, and the public health crisis could have political implications for President Xi.
Growth in U.S. exports to China (from the recent trade deal) will be delayed.
On the bright side, researchers may have made a breakthrough in the search for a vaccine.
Many believe the virus will continue spreading for months and will not peak until April or May
U.S. Economy / Inflation
ADP jobs report 291,000 private sector jobs — stronger than estimate of 150,000.
Friday 2/7 — monthly employment report – 225,000 nonfarm payrolls – stronger than expected, including 44,000 construction jobs, related to a boom in housing.
Unemployment rate 3.6%, wage growth 3.1%.
Labor force participation rate up to 63.4% in January from 63.2 in December – many are re-entering the labor force.
Despite this very strong data, inflation is not a concern for now.
ISM manufacturing index 50.9 in January, up from 47.2 in December – shows that U.S. manufacturing is making a comeback.
Federal Reserve
Due to the recent decline in 10-year bond yields to the 1.50% range, expectations were growing that the Fed would cut rates again, in order to prevent the yield curve from becoming inverted.
However, all the recent strong economic data makes a Fed easing move less likely any time soon. Fed funds futures are pricing in almost a 90% probability of no change in rates at the Fed’s next meeting on March 18th.
The Fed said on Friday that the coronavirus presents a new risk to the U.S. economy.
Earnings
Fourth quarter earnings have been generally better than expected, with 70% of earnings reports above consensus estimates.
Summary and Implications —
Last week’s political developments were generally bullish for the market, as they suggest a greater likelihood that the President will be re-elected, meaning a continuation of the current economic policies.
Recent data shows that the U.S. economy appears to be accelerating, now that much of the uncertainty regarding trade deals has been resolved.
The coronavirus remains a wildcard.
Other Markets:
Bond Market:
- Bonds and stocks have been moving in opposite directions, due to “risk on / risk off” behavior.
- In late January when the coronavirus news was first reported, bond prices rallied and stocks fell. This was a move to a “risk off” environment (bonds up in a flight to safety, stocks down).
- In early February, stocks rallied and bonds pulled back.
Foreign Equities: Emerging markets (EEM), especially the Chinese market, have plunged in the past few weeks due to the coronavirus.
Prices of Oil and other Commodities: Oil prices and commodity prices in general have plunged in the last few weeks, due to the virus in China. In early January oil was around $63 a barrel and now it is down to $50.
Dollar: The dollar has been trending higher this year, as the euro has dropped from about 1.06 to 1.04.
Gold: Gold remains in an uptrend.
U.S. Stock Market:
A review of market indicators shows the following:
Price / Volume activity (over the last few weeks)
Distribution Days: 4 SPX, 4 Nasdaq – a bit worrisome but not overly bearish
Behavior of Leading Stocks
Leading stocks have been generally strong — bullish
Breadth / Divergences
Some breadth indicators are showing bearish divergences with the S&P 500, such as the percentage of stocks above their 40-day moving average
Small caps have been weaker than large caps – the Russell 2000 fell below its 50-day moving average in late January, and still has not climbed back to its mid-January highs, as other indices have
Overbought / Oversold
The market has been rising steadily for 4 months, so it is somewhat overbought and overdue for a correction
Support / Resistance
The S&P 500 found support at its 50-day moving average on its recent pullback, but if the coronavirus turns into a global health crisis a deeper pullback is possible
Highs and Lows / Trends
Long-term Trend – uptrend remains intact.
Short-term Trend – uptrend remains intact — the small pullback in late January was followed by renewed strength in early February. The S&P has reached its January high and the Nasdaq has made a higher high.
Sentiment
- Investors Intelligence bullish sentiment has dropped in the last few weeks to 47.6% — thus sentiment is not at an extremely bullish level which would indicate a top
- The VIX shot up to 19 when stock plunged in late January, but has pulled back to 15
- Put / Call ratio: 0.90 — neutral (note: above 1.20 is bullish, below 0.60 is bearish)
Summary: Stocks have been rising for four months straight, and therefore are overbought and overdue for a pullback. The coronavirus has become a serious concern, but the jury is still out on how serious it will become, and what impact it will have on the global economy.
Despite the virus, the market has been resilient, due to very good political and economic news along with good earnings reports.
Thus our strategy has been to make a minor reduction in equity exposure from 80% to 70% because the market is overbought and there is a growing risk of a correction, but to use any pullback as a buying opportunity.