Monday Market Review January 27, 2020
In a lighter week for economic numbers, home prices and sales both increased, while the index of leading economic indicators showed a decline to end the year.
Global equity markets all fell due to global concerns over the new outbreak of the coronavirus in China. Bonds, in typical fashion, fared well with interest rates ticking down across the treasury yield curve. Commodities also suffered along with fears of a global growth impact from the virus—especially affecting already-battered energy prices.
Global stocks suffered in unison for the first week in some time, as concerns over spread of the coronavirus from China weighed on sentiment. In the past, such contagions, such as SARS in the early 2000s, have put a temporary damper on Chinese growth of up to a percent—this is especially a concern given the timing of this outbreak with the Lunar New Year celebration, which coincides with higher travel volumes that usually result in a spike in consumer spending.
By sector, defensive utilities ended the week as the only sector in the green, with energy and materials faring the worst. The sub-sectors of gaming, airlines, and tourism performed poorly, in keeping with the unknowns surrounding the magnitude of the virus and potential impact on global travel to and from affected locations. Administration discussions again about possible tariffs on European automakers also added to the soured sentiment to some degree possibly. Real estate gained in the U.S. and Europe, due to its defensive characteristics, but lost ground in Asia. Thus far, earnings results have come in for almost 20% of S&P companies, with positive surprises far outweighing negative ones. Growth is focused in utilities, financials and healthcare, while the energy sector continues to pull expectations for the broader market down to around -1% to -2% year-over- year. Hopes are that 2020 will be better following this coming week, which will bring a flood of company reports.
Foreign developed markets stocks ended the week with declines of a slightly smaller magnitude than U.S. stocks. On the positive side, German and French manufacturing picked up a bit, with some progress in Brexit decision-making. This was offset by greater weakness in emerging markets as expected, with Chinese equities falling upwards of -5% along with the mentioned likely economic impact of the virus, and peripheral Asia also registering losses. Oil exporters, such as Russia and Mexico fared poorly in light of far lower crude oil prices.
U.S. bonds gained as a result of the global turn away from risk assets, toward the safety of government debt, which offered the best returns of the week—outperforming corporates. High yield prices declined, in keeping with movements away from risk. Foreign bonds were similarly mixed, with developed market treasuries gaining ground, despite the headwind of a stronger dollar, and emerging market bonds declining.
Most commodity groups fell last week, led by overall demand concerns in energy and industrial metals—largely related to potentially weaker global growth in China as a result of to the potential virus contagion, but coupled with already strong stockpiles that have kept prices contained. The price of crude oil dropped by over -7% to a shade above $54/barrel, due to these global implications, while natural gas declined by a similar magnitude, to under $2/unit, with carryover demand effects in addition to warmer-than-normal weather around the U.S.
(0) The FHFA home price index rose in November by 0.2%, the same rate as the prior month, but fell a tenth of a percent below forecast. Prices rose in every region but one, led by East North Central, up almost a percent, while the Mountain state prices fell by a tenth. Year-over-year, the index rose at a continued strong pace of 4.9%, although down -0.3% from October’s over-5% pace.
(+) Existing home sales for December showed a gain of 3.6% to 5.54 mil. seasonally-adjusted annualized units, reversing a decline the prior month and beating estimates calling for 1.5%. This ended up being the best month in nearly two years. Sales for single-family units rose by 3%, but were eclipsed by multi-family rising 11%. Regionally, sales in the Northeast and South gained 6%, closely followed by the West, while sales in the Midwest declined over a percent. Year-over-year, existing sales are up 11%, with the average listing period falling by almost a week from a year ago to 41 days. Low inventories continue to be an issue in holding the market back.
(-) The Conference Board’s Index of Leading Economic Indicators fell by -0.3% in December, negating a small increase earned the prior month. It appeared that a rise in jobless claims for the period and lower building permits accounted for the negativity. For the latter half of 2019, the LEI fell by an annualized rate of -0.7%, which is in sharp contrast to the annualized 0.9% positive growth trajectory achieved during the first half of the year.
The coincident indicator, on the other hand, rose 0.1% for the month, while the lagging indicator fell by -0.1%. The coincident indicator actually accelerated to an annualized rate of 1.5% for the second half of the year. While the leading indicator showed weakness, this is in keeping with other economic data received at the time, which raised recession probabilities and spurring the Fed’s easing actions. Interestingly, as seen in the second chart below, the LEI has experienced several spurts of growth and pullback over the last decade, although these were of a far more muted magnitude than the decade before the financial crisis.
(+) Initial jobless claims for the Jan. 18 ending week rose by 6k to 211k, but not quite to the 214k level expected. Continuing claims for the Jan. 11 week fell by -37k to 1.731 mil., far below the 1.756 mil. consensus forecast. Claims were regionally dispersed, with no apparent anomalies, other than perhaps a persistent issue of year-end seasonal adjustments. Overall, this indicator points to continued strength in labor markets with minimal layoff activity.
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.