Stocks continued lower last week, as the S&P 500 fell by 2.12 percent to 3,225.52. That left the benchmark index down 0.16 percent 2020-to-date, and only 3.13 percent below the all-time closing high hit just two weeks ago. Several gauges of business activity both in America and overseas have started to improve ever since the preliminary Phase One trade deal was reached between the United States and China. This was an encouraging development for investors looking for a global reflation trade to gain momentum this year. However, in our 2020 outlook we also cautioned that exogenous shocks to the economy are always a risk, especially for a record-long expansion that recently experienced an inversion in the yield curve. Such external threats can include a surge in oil prices, a headwind in early January that fortunately appears to have already subsided, and of course a global epidemic like the new coronavirus. For the latter, the economic hit can come from supply disruptions, reduced travel, and more generally the slowdown in activity caused by the impact fear and uncertainty may have on both consumer and business behavior.
Since this new outbreak is still in a relatively early stage, the ultimate scale and severity remain to be determined. For now we can only look at outbreaks from the recent past for a potential guide, such as SARS in 2002-2003. Indeed, this respiratory illness dealt a substantial but temporary blow to the global economy. Much of the macroeconomic damage occurred in China, where the virus originated and annual GDP growth was reduced by a full percentage point as a direct result of the outbreak. The Chinese economy, though, still managed to grow by 10 percent in full-year 2003, and other affected countries saw a similarly quick bounce back in activity. The same dynamic played out in global stock markets during the SARS pandemic, with equities being under pressure, particularly in the more affected regions, until the spread of the disease was finally under control. The economic and market disturbances were even shorter-lived during the swine flu and other post-SARS outbreaks, and some experts are optimistic that any domestic impact from the latest coronavirus might have at least been partially mitigated by the handful of quick-response precautionary measures already taken on top of America’s improved preparedness and medical capabilities. However, a lot of uncertainty still surrounds this situation, and there are various other looming risks for the markets to overcome in the near-term, so it would not be surprising if volatility remains elevated. Any regular investors unsure how to navigate this environment should consider working with a professional financial advisor and as always, we are here to help with any questions you may have.
To recap a few of the things we learned about the economy last week, the positives included that mortgage applications rose, demand for American-made durable goods exceeded estimates, regional business activity improved, initial jobless claims remained historically low, consumer confidence firmed, and U.S. gross domestic product expanded by at least 2.0 percent for the 11th consecutive quarter. As for the negatives, housing inflation picked up, new home sales disappointed forecasts, pending home sales fell, and a key gauge of business investment declined. This week the pace of economic data remains elevated with several important reports on manufacturing, the service sector, productivity, consumers, and employment scheduled to be released, including the potentially market-moving January job report from the U.S. Labor Department due out on Friday.
What To Watch:
- MBA Mortgage Applications 7:00 AM ET
- ADP Employment Report 8:15 AM ET
- International Trade 8:30 AM ET
- 3-Yr Note Announcement 8:30 AM ET
- 10-Yr Note Announcement 8:30 AM ET
- 30-Yr Bond Announcement 8:30 AM ET
- Treasury Refunding Announcement 8:30 AM ET
- PMI Services Index 9:45 AM ET
- ISM Non-Mfg Index 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- Challenger Job-Cut Report 7:30 AM ET
- Jobless Claims 8:30 AM ET
- Productivity and Costs 8:30 AM ET
- EIA Natural Gas Report 10:30 AM ET
- Employment Situation 8:30 AM ET
- Wholesale Trade 10:00 AM ET
- Baker-Hughes Rig Count 1:00 PM ET
- Consumer Credit 3:00 PM ET
Sources: Econoday, Wells Fargo, J.P. Morgan, Brookings, Nordea
Post author: Charles Couch