A Short But Volatile Week for the Market

Market Recap Week ending 2/21/2020

The holiday-shortened week provided a roller coaster ride for investors.  The week brought a new set of all-time highs for equities while at the same time established an all-time high for the 30-year bond with a yield of just 1.89%.  The spread of the Coronavirus continued to dominate the headlines and induced Apple to announce that it would miss the company’s 1st quarter revenue forecast.  At the same time, concerns regarding valuations provided pause and reason to take some money off the table.  Economic data reported during the week was, for the most part, constructive, but the Flash Markit Services PMI indicated that the services sector has entered contraction territory and gave more reasons for investors to sell.  The S&P 500 lost 1.3% on the week while the Dow gave up 1.4%, the NASDAQ shed 1.6%, and the Russell 2000 outperformed its peers with a loss of 0.50.  Safe-haven assets had a great week.  The US yield curve continued to flatten as the 2-year note yield declined by seven basis points to close at 1.35% while the 10-year bond yield fell by eleven basis points to close at 1.46%.  Gold continued to rally and closed at a five year high gaining $67.20 or 4.3% for the week to close at $1649.90 an Oz.  Oil also continued to stabilize with a gain of 2.89% or $1.44 to close at $53.37.  There were no changes to our models last week. 

The Coronavirus continued to be headline news.  Contractions outside of China spiked during the week, specifically in South Korea.  This news, coupled with the revenue miss pre-announcement from Apple, brought global supply-chain disruptions and the global demand for products into question.  While most agree the virus is a transitory variable, the near term effects continue to add up and may provide a reason for some continued weakness. 

The S&P 500 hit an all-time high on Wednesday and, at the same time, produced a 12 month forward P/E of 19x according to FactSet estimates.  This P/E ratio is well above the 5, 10, 15, and 20 year averages and is the first time since May of 2002 that the ratio has been at 19x.  Valuations are elevated in a historical context and this may also give some investors reason to be selling the market here.