Weekly Market Commentary, February 19, 2020
The coronavirus, dubbed COVID-19, continues to threaten lives, communities, and the global economy. The number of cases keeps climbing, although the Chinese revised the definition of who has been diagnosed with the virus. There were signs the spread of the virus is slowing, but the revised definition makes it more difficult to analyze, and health and economic risks remain.
Elsewhere, global economic data continues to show a moderately strong consumer contrasted by weakness in manufacturing. The accompanying chart, tracking retail sales, shows consumers are still spending but at a slower pace than in recent months. Retail sales grew 4.4 percent over the last year. Core retail sales, which exclude more volatile items, showed a further slowdown, growing only 2.3 percent. Manufacturing in the United States continues to stagnate, slipping 0.1 percent last month. The weakness in manufacturing and trade contributed to the Eurozone’s GDP (Gross Domestic Product) growth shrinking to under 1 percent.
Investors maintained their optimistic outlook, in spite of the news. The S&P 500 gained 1.6 percent last week and presented investors with a new high on Valentine’s Day. The MSCI ACWI climbed 1.2 percent. The Bloomberg BarCap Aggregate Bond Index was basically unchanged.
Continued data on the spread of COVID-19 and the economic repercussions will be of greatest interest to many investors. Potential supply disruptions and the resulting risks from cancelled events, missed orders, and people staying home may pressure stocks. A notable tech company announced on February 17 the virus reduced production at its facilities and retail demand in China. Economic data and earnings calls in coming weeks will provide more information on how shortages and lost sales are affecting companies.
Data as of 2/14/20
Standard & Poor's 500 (Domestic Stocks)
Dow Jones Global ex-U.S.
10-year Treasury Note (Yield Only)
Gold (per ounce)
Bloomberg Commodity Index
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
How Do You Fight a Virus?
There has been a steady increase in the number of patients, deaths, and, thankfully, recoveries from the coronavirus. The tragedy will hopefully turn toward improved recovery rates and fewer new patients soon. Until then, the global economy must wrestle with how to minimize potential damage.
China’s economy has been the most damaged. Nearly 99 percent of the reported cases are in China. China’s share of the fatalities has been even higher. With workers staying home, trips to the store being limited, and travel curtailed, lots of firms and workers in China will face difficult times. Chinese officials must confront a massive challenge as they seek to keep more people from getting sick while slowly allowing healthy people to get back to work.
For economic policymakers, a top goal is to prevent a bad situation from getting worse. One of the biggest risks is companies are facing a temporary revenue gap even as debts and rents remain due. China has taken many steps to encourage markets and make borrowing affordable and available. Interest rates have been cut, and cash has been made available to banks to lend to those needing support. Regulatory changes have been delayed to allow investors to increase allocations to risky assets. In China, where policy can be guided by general directive, press conferences announcing inflation will be kept under control and growth will be prioritized as part of the plan to recovery. As long as investors remain confident, markets and capital are likely to be plentiful and firms will be able to weather the challenges.
The negative consequences have spilled over to other areas. As noted in the previous section, a notable tech company issued a statement saying COVID-19 will cause it to miss its quarterly estimates. While its factories are open, production has not returned to normal. Chinese retail demand for phones has also shrunk as people are avoiding contact and not prioritizing upgrading their phones.
The effects of the coronavirus will be seen across the globe. Research from indexing and risk management firm MSCI indicates many Asian countries will be heavily affected. Singapore, Hong Kong, Taiwan, and Korea are all heavily reliant on Chinese factories and demand. Australia ships many resources to China, and reduced demand will likely affect its economy, too. Global GDP will experience more pressure the longer the crisis lasts.
We have been puzzled by the sharp rally after markets dropped on initial concerns. There is some evidence the Chinese have been successful in slowing the virus’ spread, but the accuracy of the data and tests make this a more risky venture. The length of the crisis also puts pressure on more firms. Global stock markets hitting new highs express more confidence than we are ready to provide.
[The first quarter provides us a number of opportunities to interact with some of our readers. For the next month, we’ll share some of the questions we get from readers.]
No one wants to see what is happening with the coronavirus. Will more companies move back to the United States because of the virus?
The coronavirus and the trade war have pointed out the risks of concentrating too high a percentage of a company’s manufacturing in one region. Trade wars between the United States and China have made moving production more attractive. The coronavirus further encourages this as the disease has shut down large chunks of the Chinese manufacturing and transportation industries.
Some of those relocations may involve manufacturing moving back to the United States. Mexico, on the strength of the USMCA (United States-Mexico-Canada Agreement) trade deal, and other Asian countries are also very likely to benefit. But, we should not underestimate the benefits of doing business in China. Wages have grown, but the highly educated workforce and logistics infrastructure have contributed to the competitive advantage China has in many manufacturing markets.
Any other questions about this week in the market? Drop us a line!
https://markets.ft.com/data/world (Click on ‘Global indices’ at the bottom left of the map and choose ‘5 day’) (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/02-18-20_FinancialTimes-Global_World_Markets_Indices-Footnote_1.pdf)
https://www.ft.com/content/8732e814-4e82-11ea-95a0-43d18ec715f5 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/02-18-20_FinancialTimes-Investor_Complacency_Sets_in_While_Coronavirus_Spreads-Footnote_2.pdf)
https://www.barrons.com/articles/dow-jones-industrial-average-gained-1-this-week-as-stocks-ignore-the-coronavirus-51581726118?mod=hp_DAY_1 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/02-18-20_Barrons-The_Dow_Jones_Industrial_Average_Gained_1_Percent_this_Week-Let_It_Ride-Footnote_3.pdf)