Strong Economic Movements and Data Lead to Market Rebound

Market Recap Week ending 2/7/2020

Markets rebounded nicely last week as robust economic data bolstered investors’ appetite for risk assets, an injection of liquidity into the Chinese markets by the Chinese central bank, positive developments on the trade front, constructive news on progress for a coronavirus vaccine- which in turn helped to dull the fears of the virus, and more solid earnings from corporate America, also helped.  The S&P 500 advanced 3.17% for the week while also hitting another all-time high.  The Dow gained 3%, the NASDAQ increased by 4.04%, and the Russell 2000 added 2.65%. Safe-haven assets took a step back last week with the 2-year note yield rising seven basis points to close at 1.39% while the 10-year yield increased six basis points to close at 1.58%.  Gold lost $14 on the week and closed at $1573.5 an Oz.  Oil continued to decline even as OPEC discussed the prospects of further production cuts. For the week, WTI lost $1.23 or 2.4% closing at $50.35 a barrel. 

The week started with the ISM manufacturing report, which came in better than expected at 50.9% versus expectations of 48.1%.  The report is the first in 6 months to be above 50, which suggests the manufacturing sector expanded in January.  Additionally, the ISM Non-manufacturing report showed acceleration from prior readings and suggests the services sector continues to do well.  The announcement came in at 55.5% versus an expectation of 55%.  Weekly jobless claims for the week came in at the lowest levels in 9 months and were down 15,000 to 202,000.  The employment situation report was also stronger than expected.  The economy added 225,000 jobs in January well above the expected 164,000 jobs.  The report also showed an increase in average hourly earnings and a healthy uptick in the participation rate. 

Markets advanced on the announcement that the PBOC, the Chinese Central Bank, had injected liquidity into their banking system.  The initiative aims to increase lending activity, which in turn will help the Chinese economy, which has been most affected by the coronavirus.  Also, Chinese news sources suggested that the PBOC would, in the coming weeks, cut key lending rates and are likely to reduce the reserve requirement ratios on banks. 

Another catalyst for the markets last week was the announcement by Chinese trade officials that they would reduce tariffs on $75 billion in goods on February 14th.  The news offset some concerns that the Chinese will be unable to meet their purchase obligations made within the Phase One agreement.  None the less, the reduction was a positive development and may portend other good things to come on the trade front. 

The coronavirus continues to spread with more than 25,000 confirmed contractions and over 800 deaths.  The fear of what this means to humanity and global economies hit the markets in the prior week, wherein last week, some of the fear diminished with the announcement of several initiatives.  World health organizations are working on multiple fronts to create a vaccine and had some positive developments on that front last week although there is still much more needed to be done before a vaccine is created.  China also pledged  $10 billion to fund the pursuit of a vaccine.  The coronavirus will be a continuous variable that investors will need to contend with of the next several weeks and months and economic data that show the initial impact of coronavirus’ impact on the global economies will most likely start to manifest itself in the coming weeks. 

According to FactSet, 64% of the S&P 500 have now reported Q4 earnings.  Of that, 71 % have published positive surprises on earnings per share, and 67% have beat expectations on Revenue.  Currently, the blended earnings growth rate is 0.7% and if it can stay positive throughout the rest of the earnings season, it will be the first time since Q4 0f 2018, where this blended growth rate has been positive on a year over year basis.  All that said, corporate earnings continue to be a tailwind for the market and have helped push the market to all-time highs.  As I mentioned last week, the current 12 month forward Price/Earnings ratio of 18.8x continues to be well above the 5-year and 10-year averages of 16.7x and 15x, respectively.