Markets Continue to Struggle from Growing Coronavirus Fears

Market Recap Week ending 1/31/2020

Markets continued to struggle last week from fears surrounding the spread of the novel strain of Coronavirus and its effects on the global economy.  The energy sector fell 5.7% last week on the notion that China’s consumption of oil and other energy products may have been cut by 20% due to government lockdown. Other economically sensitive sectors were also hit, Materials lost 3.5% on the week.  Earnings continued to show a mixed bag of results with large-cap tech continuing to post impressive results while some transports and industrials posted lackluster reports.  The Federal Reserve also concluded their January meeting with leaving their policy rate unchanged at 1.50% to 1.75%.  For the week the S&P 500 lost 2.1%, the Dow gave up 2.5%, the NASDAQ fell 1.6% and the Russell 2000 continued to lag with a loss of 2.9%.  Safe-haven US treasuries continued to be well bid with the 2-year and 10-year yields falling sixteen basis points to close with yields of 1.32% and 1.52%, respectively.  Gold gained ~ $15 to close at $1587 an Oz.  As I mentioned earlier, oil continued to struggle and posted a weekly loss of 4.9% or $2.63 a barrel to close at $51.85. 

Last week the CDC announced the first confirmed case of person to person transmission of the novel Coronavirus strain.  There have been 362 deaths in China, and the government there extended the lunar holiday to thwart the spread of the virus.  The economic cost of the lockdown is still unknown but certainly has already made a significant impact on the global economy and has been manifested in the global financial markets.  Oil and Emerging Markets have taken the brunt of the sell-off.  It has been estimated that the demand for energy has decreased by 20% over the last couple of weeks in China.  Global officials are taking the threat of the virus seriously, and while it appears that the reaction may be a bit overdone here, investors will need to continue to follow the developments over the next several weeks and months.

Fourth-quarter earnings results continue to flow into the market.  45% of the S&P has reported and so far, it appears to be a bit of a mixed bag of results.  Looking forward, analysts now expect EPS growth of ~3% in the first quarter of 2020 and nearly 6% for the second quarter of 2020.  The market is trading at 18.4x EPS which is above both the 5-year and 10-year averages.  This higher than average valuation could also be used as an excuse by investors to take some money off the table. 

Finally, no real surprises at the Federal Reserve last week.  They kept their policy rate unchanged at 1.50%-1.75%.  The Chairman did mention that they would extend their repurchase arrangement until April but this is more a technical issue than anything else.  It appears the Fed is on hold for a while and is likely to let inflation run through its target rate before it would tighten monetary policy. 

Darren Leavitt, CFA

Portfolio Manager

& Sr. Market Analyst