Monday Market Review February 24, 2020
On a shortened holiday week, economic data included stronger regional manufacturing results, a rebound in the broader measure of leading economic indicators, and decent housing data.
U.S. and foreign equity markets fell back last week as the economic impact of the coronavirus again negatively weighed on market sentiment. However, bonds fared well, as investors sought safety. Commodities were mixed, featuring stronger results for precious metals and the energy sector.
U.S. stocks fell last week, as positive sentiment from the prior week about containment efforts of the coronavirus, and resulting new record highs for the S&P 500 and Nasdaq, turned to worries over the economic and earnings impact globally. Every sector ended in the red, with defensive utilities losing the least, about a tenth of a percent; technology stocks fell over -2% with assumed supply chain effects from the virus seeping into earnings. Real estate fared flatly also, along with defensive assets.
On Saturday, Feb. 22, the Nevada caucuses began, which was the third step in the Democratic primary process. While the overall delegate count is small for these early primaries, they’ve shown the most value as early momentum builders for upcoming key dates, such as Super Tuesday, where a significant percentage of convention delegates are picked.
Foreign stocks performed largely in line with U.S. equities, with additional trickle-down concerns from the coronavirus, although manufacturing data in the eurozone improved a bit—raising prospects for bottoming and a recovery. Japanese stocks were held back by a far sharper-than-expected decline in GDP for the prior quarter, due to weather impacts and higher taxes. The stronger dollar also weighed on returns, as well in as nations tied to exports, such as South Korea and Brazil. China has been conducting significant monetary easing, which began before the coronavirus took hold, but included additional rate cuts and other measures last week—resulting in sharp gains in domestic markets. Military tensions between Turkey and Russia over Syria also contributed to mixed emerging market results.
U.S. bonds ticked higher along with investors flows towards safety, with governments outperforming credit, as expected. High yield and floating rate lagged with minimal returns for the week. Foreign bonds fared well in local terms for both developed and emerging markets, but lagged when translated back to account for a stronger dollar.
Commodities were mixed to slightly higher, despite the stronger dollar. Precious metals rose by several percent as investors sought safety, in addition to a less dramatic recovery for energy. The price of crude oil regained 2% to near $54/barrel.
(+) The Empire state manufacturing index improved by 8.1 points to 12.9 in February, beating forecasts of a flattish 5.0 reading. Shipments and new orders both rose further into expansionary territory. On the other hand, employment and prices paid each fell a few points, while still growing, as did the index for expected business conditions six months out.
(+) The Philadelphia Fed manufacturing index rose by a dramatic 19.7 points to 36.7, far exceeding the level of 11.0 expected by consensus. New orders and shipments both rose to further expansionary levels within the index. Employment fell by nearly -10 points, but remained expansionary, as did prices paid. Expected business conditions for the next six months also rose by several points to a sharply expansionary level. This reading, coupled with the stronger Empire state result, point to improvement in manufacturing sentiment likely driven by the partial resolution to U.S.-China trade woes, although it’s not fully apparent how much the coronavirus scare has affected or will affect sentiment.
(-) The producer price index for January experienced a rise of 0.5% on both a headline and core level, far surpassing expectations of a 0.1% increase for each. The headline figure included nearly a percent drop in energy prices, and slightly higher food prices. The core measure was the primary driver of price change for the month, due to higher retail margins and especially crude materials prices outside of food and energy, which rose 6%. Year-over-year, PPI rose at a 2.1% rate on a headline basis, and 1.7% for core, which were largely in line with or below other measures, such as CPI and PCE.
(0) Existing home sales fell by -1.3% in January to a seasonally-adjusted annualized level of 5.46 mil. units, which actually outperformed expectations for a deeper decline of -1.8%. Between the two key groups, results were similar, with sales for single-family falling -1%, and condos/co-ops down close to -2%. Regionally, the West was responsible for all of the declining activity, with sales down nearly -10%, as the other three regions were flat or a bit higher. Inventories remain tight, at 3.1 months sales, which is just a tick above an all-time low for the series, down -11% from last year, and continues to reflect a lack of available homes. However, sales are up 10% from a year ago. The median sales price declined to $266,300, which is 7% higher than a year ago.
(0) Housing starts for January fell by -3.6% to a seasonally-adjusted annualized rate of 1.567 mil. units, which outperformed the -11.2% decline expected. Single-family starts were responsible for the final figure, down -6%, as multi-family rose just short of a percent. Starts in the Northeast rose by 32%, while the Midwest at the other end declined sharply by -26%. Building permits rose 9.2% for the month, which reversed a decline the prior month and outperformed the 2.1% increase expected. This consisted of a 6% rise in single-family permits and 15% for multi-family. Permits rose in all regions, also led by the Northeast rebounding by 35%. As with a variety of items at year-end, weather extremes (or lack of extremes in this case, due to a milder than normal winter) can tweak the metrics more than normal, so coming months should offer more clarity. Starts are over 20% higher than a year ago, which also demonstrates a positive trend for new building activity, although it continues to be clustered in the multi-family segment. It’s assumed that starts need to be at least a consistent 1.5 mil. level to keep up with demographic and fundamental demand, which has only begun to be again reached.
(-) The NAHB housing market index ticked down by -1 point in February to 74, lagging the flat 75 reading expected. Current and future sales, as well as prospective buyer traffic, all pulled back by the same single point. Regionally, the Northeast and South each gained several points, while the Midwest and West fell by up to -5 points. This index, which reflects homebuilder sentiment remains at decent levels, despite the recent flattening.
(+) The Conference Board Index of Leading Economic Indicators for January rose by 0.8%, reversing a decline the prior month. The single month result appeared to be driven by improved jobless claims, strong housing building permits, as well as higher consumer sentiment. In the ISM metric, lower new orders as well as lower weekly manufacturing hours served as negative contributors. The coincident index rose by 0.1%, while the lagging index was unchanged in January. Over the last six months, the leading index rose at an annualized rate of 0.2%, which remained a weaker result than the 1.6% annualized pace of the prior semiannual period. While the pace of growth appears to have flattened, and concerns have evolved from U.S.-China trade to the coronavirus, underlying aggregate conditions captured by this index appear to have stabilized a bit lately.
Source: The Conference Board. Gray shaded areas represent recessions as defined by the NBER.
(0/-) Initial jobless claims for the Feb. 15 ending week ticked up by 4k to 210k, matching expectations. Continuing claims for the Feb. 8 week rose by 25k to 1.726 mil., exceeding consensus estimates calling for 1.717 mil. No anomalies were reported, other than half of the initial claims originating from California, but overall activity continues to run at very low levels.
(0) The FOMC meeting minutes from late January told a similar story to the previous meeting. In keeping with what’s being tracked by broader markets, worries over U.S.-China conditions deteriorating have been replaced by the newer concerns around the global impact from the coronavirus (now called COVID-19) contagion.
Inflation remains another ongoing issue discussed by the committee, being a cornerstone for monetary policy measurement. As in prior meetings, discussions of an ‘asymmetric’ approach, or letting inflation ‘run hot’ to compensate for slower ‘cool’ periods, continues to be a more popular approach advocated by several participants. The downside, raised by the opinions of other participants, is that an extended period of low rates could increase chances of financial instability (like asset bubbles). In less controversial policy matters, it appears that the consensus view is that current interest rate conditions remain appropriate. The backstop for repo markets is likely to continue until at least the end of tax season, which is a primary liquidity event for corporate borrowers.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.